San Bernardino wins round in bankruptcy battles

RIVERSIDE, Calif. (AP) -- A U.S. bankruptcy judge derailed efforts by California's giant pension fund to get paid before other creditors in the city of San Bernardino's bankruptcy Friday, as creditors lined up to oppose the debt-ridden city's eligibility for Chapter 9 bankruptcy protection.

A California Public Employees' Retirement System spokesman told the Wall Street Journal that Judge Meredith Jury in Riverside ruled that the millions of dollars in contributions the city owes may have to be paid back as part of the city's final reorganization plan.

A spokesman for the city could not immediately be reached.

San Bernardino, located 60 miles east of Los Angeles, filed for bankruptcy protection in August after learning it faced a $46 million deficit.

The cash-strapped city halted payments to its biggest creditor, CalPERS, last summer. The city said it could only provide essential services and there wasn't enough money to send CalPERS its required employee pension contributions.

The city anticipates deferring the payments until the end of fiscal year 2013. CalPERS calculates San Bernardino will then owe the pension plan up to $19 million.

CalPERS said in October that the city hasn't provided enough information to prove that it is insolvent. CalPERS insists the city can come up with a plan to adjust its debts.

San Bernardino's financial figures were described as unreliable by CalPERS lawyer Michael E. Lubic.

The city responded with documents saying there was enough relevant information. The city criticized CalPERS for "a harangue replete with misstatements respecting the city's production of documents."

Besides halting CalPERS payments, the city approved a court-mandated austerity plan last month that slashes more than $26 million in spending and freezes debt payments.

The City Council also voted to freeze vacancies in the Police Department and cut the Fire Department overtime budget by 35 percent.

In court documents filed last week, CalPERS called the bankruptcy a "sham," claiming the city filed for protection simply to buy time. The city's new budget plan doesn't qualify because it depends on deferring payments owed to CalPERS and other creditors, the documents state.

Giving the money as an "involuntary loan" could threaten the soundness of the pension fund, violating its constitutional duty to protect retirees statewide, CalPERS chief executive officer Ann Stausboll told the San Bernardino County Sun.

"The system has to be sound so we can pay the benefits," Stausboll said. "These people have worked their entire lives, choosing a career in public service. They made life decisions based on that."

Still, City Attorney James Penman told the City Council on Monday that San Bernardino has "a very strong case" for Chapter 9 bankruptcy eligibility.