San Bernardino Bondholders Take on CalPERS in Court

(December 12, 2012) – A group holding San Bernardino city bonds have filed a protest against the California Public Employees’ Retirement System (CalPERS) in a local bankruptcy court. 

CalPERS has been demanding the right to sue the bankrupt city, which has fallen behind on its pension payments to the $245.5 billion fund. The municipality, with a population of about 210,000 became one of the largest cities ever to seek protection under Chapter 9 when it filed for bankruptcy this summer, roughly $1 billion in debt. 

Some of the city’s bondholders (Wells-Fargo, among others) and bond insurers (such as Ambac Insurance Company), argue that the pension system is seeking preferential treatment over other, equally legitimate, creditors. 

“CalPERS contends that because it is an ‘arm of the state,’ the court should ignore the Supremacy Clause of the United States Constitution and over 70 years of legal precedent to elevate CalPERS’ pecuniary interest above the interest of the city and its other unsecured creditors,” the bondholders assert in their protest filings. “CalPERS solipsistic view ignores every other entities’ interests.” 

The fund, which is the largest public pension system in the US, argues they are fulfilling their fiduciary duty. “CalPERS is asking the Bankruptcy Court to recognize the right of the system to enforce those obligations of the City that arose after the filing of the bankruptcy petition,” Amy Norris, a CalPERS spokesperson, told aiCIO in an email. “CalPERS is acting responsibly, fulfilling our fiduciary duty to protect our members and their pensions. City politicians should pay promised retirement benefits of their employees who live here, work here, retire here and pay taxes here.” 

The bondholders take the stance that CalPERS is inflating its authority and right to San Bernardino’s remaining assets. “CalPERS attempts to obfuscate the narrow scope of its authority by claiming to be ‘an arm of the state,’” they said in court documents. “Regardless of whether this claim is correct, CalPERS’ task of pension administration is neither a sovereign activity nor an exercise of police or regulatory power.” 

At the retirement system’s board meeting today, Robert Glazier, CalPERS’ deputy executive officer for external affairs, spoke about California’s municipal/county bankruptcies and the fund’s ensuing legal battles. 

“Our members have been responsible,” Glazier said. “They go to work. They do their jobs. They have made their contributions to help fund their retirements. CalPERS has been acting responsibly by being prudent fiduciaries and protecting the pensions of our members. Legislators have over spent, over committed and they are taking action that are unwise or illegal such as making pension payments required by law. Bankruptcies affect everyone, especially those that live, work, pay taxes and retire in the affected communities. CalPERS’ actions are guided by principles, law and a concern for people’s lives.”