Nuclear CalPERS

October 24, 2012

Things are heating up in the Golden State as bankrupt San Bernardino has stopped making payments to CalPERS, California’s public employee pension system. CalPERS, of course, had something to say about it. Reuters’ Tim Reid reported:

“These [pension] payments are required to be made under California law,” Calpers said in an e-mail to Reuters. “If Calpers and the city cannot resolve the missed payments, Calpers will assert its rights and remedies available under applicable law.”

Calpers spokeswoman Amy Norris said in a telephone interview that if the payments were not made and continued to fall due, “we will pursue collection through legal action.”

Ultimately, Norris said Calpers had the right to terminate the city’s pension plan. Any assets already in the city’s pension fund would be placed in a termination pool, “and retirees’ benefits will be reduced.”

Scary stuff. But the truth may be that CalPERS can do nothing while San Bernardino rests under the protection of the federal Chapter 9 bankruptcy court’s protection. The first result of declaring bankruptcy is that all new legal actions against the bankrupt party are barred. If a claim was not in place before the bankruptcy documents were filed, then new ones cannot be created and enforced with legal action.

A municipal bankruptcy attorney told me (under a request for anonymity) that state agencies are not treated differently than other creditors under municipal bankruptcy law, and that CalPERS claims would be unconstitutional. His description of the law makes perfect sense; otherwise a state agency would have the right to pillage a municipality’s assets.

We’ve heard that CalPERS threatened nuclear action behind closed doors in Vallejo’s bankruptcy, but this time CalPERS has made its threat publicly. CalPERS appears to believe that California state law has precedence over federal bankruptcy law, and that the state has rights over San Bernardino that trump the protections that bankruptcy gives it. The general counsel of CalPERS, Peter Mixon, made a presentation to the Board of Administration on September 12, 2012 that included this claim (number 13):

When a participating public agency terminates its relationship with CalPERS, CalPERS is entitled to priority over unsecured creditors under the laws of the State of California. An example of a statute that affords CalPERS a priority is California Government Code Section 20574. This statute provides that CalPERS has a lien on all assets of a municipality to secure all liabilities of the municipality to CalPERS owing upon a termination of the relationship, including any deficit in funding for earned benefits, interest, and attorneys’ fees and other collection costs. As secured creditors are paid before unsecured creditors, this lien creates a priority in favor of CalPERS.

Mixon’s assertion is that CalPERS essentially has the right to strip San Bernardino (or any municipality that terminates its relationship with CalPERS) of its assets. I’m not sure how it would work for a city that is not undergoing bankruptcy, but San Bernardino now has a fire wall built around it that certainly would not allow this to happen.

CalPERS seems entirely oblivious of the major fiscal stress that municipalities are facing with their pension liabilities. A more cooperative approach would help municipalities move toward fiscal sustainability.

Further reading:

Bloomberg: California City Facing SEC Probe Drained Road Funds

The Sun: San Bernardino not paying CalPERS, pointing to future fight over pensions

The Record: Stockton may seek new CalPERS contract

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