Bondholders Take Fight to Calpers in Bankrupt San Bernardino

December 11, 2012 – In The News
Reuters Online

Wall Street bondholders have thrown down the gauntlet to America’s biggest public pension fund, demanding similar right as creditors in bankrupt San Bernardino, California – and they say they could take the fight all the way to the U.S. Supreme Court.

A group of bondholders and bond insurers filed a 114-page objection to arguments by the California Public Employees’ Retirement systems (Calpers) that it should enjoy its historical primacy as a municipal bankruptcy creditor.

The San Bernardino case is moving ahead swiftly since the city filed for bankruptcy protection on August 1. It has triggered a high-stakes battle between Wall Street and state pension funds over how they are treated when cities run out of money.

The bondholders and bond insurers argue that under federal law, Calpers should be treated as any other creditor and its claims to supremacy under state law are void.

Michael Sweet, a bankruptcy attorney with Fox Rothschild in San Francisco who is not currently representing any party in the San Bernardino case, said: “This is definitely the first direct confrontation between two groups that are hugely invested in what is going on in San Bernardino.

“This is game on,” Sweet added.

Calpers is San Bernardino’s biggest creditor. The city, which has a nearly $46 million deficit for the current fiscal year, lists its unfunded pension obligations to Calpers at $143.3 million.

Calpers says if it halted its relationship with the city immediately and it had to pay all current and future obligations to Calpers today, that figure would climb to $319.5 million.