San Bernardino bankruptcy

San Bernardino, Bondholders Trade Jabs in Court

A few of San Bernardino’s biggest creditors admitted in court on Wednesday that they are doing everything they can to prevent the city from going through with its current bankruptcy plan – which involves paying CalPERS in full, but shorting other bondholders.

The creditors argued that all creditors – including CalPERS – should be treated with more equality.

From Reuters:

Lawyers for bankrupt San Bernardino, California, and the city’s creditors clashed in federal bankruptcy court on Wednesday, with a major bondholder accusing the city of stoking “Main Street versus Wall Street fires.”

[…]

A major bondholder claimed it should be treated on equal terms to that of the city’s biggest creditor, Calpers, California’s public pension fund.

The growing tension between the city and some of its biggest creditors come after the Luxembourg-based bank Europäische Pfandbrief-und Kommunalkreditbank AG (EEPK), which holds $50 million in pension obligation bonds, filed a lawsuit against San Bernardino in January.

Also suing the city in the same lawsuit are Ambac Assurance Corp., which insures a portion of those bonds, and Wells Fargo Bank, the bond trustee and flagship bank of Wells Fargo & Co.

Paul Glassman, an attorney representing San Bernardino, on Wednesday told the judge overseeing the case that EEPK is concerned that it will not be paid in full and is trying “to block confirmation of the city’s plan any way they can.”

Glassman said EEPK is trying to “cause chaos.”

Meanwhile, Vincent J. Marriott, an attorney for EEPK, said the city had misinterpreted the bank’s lawsuit, accusing it of trying to “stoke Main Street versus Wall Street fires.”

San Bernardino struck a deal last year with Calpers, agreeing to pay the pension fund in full in its bankruptcy exit plan, which it must produce by May 30.

Since then city officials have confirmed to Reuters that San Bernardino intends to pay significantly less than the full amount it owes to EEPK, Ambac and Wells Fargo, and that it views bondholder obligations as less important than its obligations to Calpers.

San Bernardino declared bankruptcy in 2012. It could have impaired pensions as part of its bankruptcy exit plan, but it chose to pay CalPERS in full. Many of the city’s other creditors, however, will not be paid in full.

Photo by Joe Gratz via Flickr CC License

San Bernardino Bankruptcy Plan Will Impair Bondholders, Not Pensions, Says City Lawyer

The attorney for the bankrupt California city of San Bernardino on Thursday said that pensions would not be altered in the course of the city’s bankruptcy.

The statement was important, because it was the first official word from the city that pensioners would be given much higher priority than its bondholders.

Observers are watching San Bernardino closely; specifically, how the city handles its pension debt during bankruptcy.

As municipal bankruptcies become more common, pension benefits are increasingly on the chopping block.

But San Bernardino officials all along said that they would preserve pension benefits and keep making payments to the California Public Employees Retirement System.

The city’s other creditors won’t be so lucky. In order to preserve pensions, the city’s bondholders will likely be significantly impaired.

On Thursday, City Attorney Gary Saenz made the following statements about the city’s bankruptcy plan, according to Reuters:

Bankrupt San Bernardino will significantly impair its bondholder creditors while paying pension fund Calpers in full in a plan to be presented in May, City Attorney Gary Saenz said on Thursday.

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Saenz said the city will present its bankruptcy plan in May to give creditors a clear idea of how much the city can afford to pay them. The city was preparing for months of challenges and possible litigation from unhappy creditors after the plan is presented, he said.

“From their perspective, they see some impairment of Calpers as reasonable if they are going to receive a significant impairment,” Saenz said, referring to EEPK, Ambac and Wells Fargo. “But we need to compare that argument to our ability to provide services for our city. And that needs a workforce. And you can’t have a workforce without pensions.”

Under the city’s bankruptcy plan that is being drafted, cutting its debt to its pension obligation bondholders “will not have the same impact on the city post-banktruptcy if we impaired pensions,” Saenz said.

In Detroit’s bankruptcy, pensions were indeed cut. But the cuts were less than many expected, and creditors still took the brunt of the hit.

Another bankrupt California city, Stockton, manages to keep pension benefits unimpaired.

Photo by Pete Zarria via Flickr CC License

San Bernardino Sued By Creditor For Favoring Pension System During Bankruptcy

The bankrupt city of San Bernardino, California has been sued by one of its bondholders for favoring pensioners over creditors during its bankruptcy.

San Bernardino has largely kept up with its payments to CalPERS. But the lawsuit claims the city has not extended equal favor to its bondholders.

From BusinessWeek:

Pension-bond holder Erste Europaische Pfandbrief- und Kommunalkreditbank AG sued San Bernardino yesterday in federal bankruptcy court in Riverside, California, claiming equal status with Calpers. The company, which holds about $50 million in pension obligation bonds, didn’t name Calpers in the suit.

“Any payment of the Calpers pension obligation portion requires equivalent payment of the bondholder pension obligation portion,” the company, a unit of Frankfurt-based Commerzbank AG (CBK), said in the filing.

Cities often issue bonds to raise money to bolster their pension obligations. In San Bernardino’s case, the money was used to fill a hole in its pension fund, which is administered by Calpers. The city also makes regular payments on behalf of its employees to Calpers, which in turn pays retired city workers.

[…]

The lead bankruptcy attorney for the city, Paul Glassman, referred questions to San Bernardino’s elected city attorney, Gary Saenz, who didn’t immediately respond to an e-mailed request for comment on the suit.

San Bernardino filed bankruptcy in 2012. Although it stopped paying CalPERS for a period of a few months, it has since resumed payments so that no pension benefits would be cut as part of its bankruptcy.

Major Creditor Comes Out Against San Bernardino Bankruptcy Plan That Fully Pays CalPERS

A major creditor of bankrupt San Bernardino told Reuters Thursday that it would oppose a bankruptcy plan that mandates the city keep paying CalPERS in full.

San Bernardino’s current plan doesn’t disrupt payments to CalPERS and keeps pensions intact.

The creditor has not been identified.

From Reuters:

A major capital markets creditor of bankrupt San Bernardino, California, will oppose any exit plan that is more favorable to Calpers, California’s public pension fund, a source familiar with the creditor’s strategy said on Thursday.

The creditor intends to pursue a new approach when hearings resume next year, in light of a deal the city reached with Calpers in November that will see the pension fund paid in full under a bankruptcy plan. The city has been ordered to produce a plan by May.

“We will strongly resist a plan that treats its pension claims substantially better than our claim,” the source involved in the creditor’s San Bernardino strategy said, who spoke on the condition of anonymity because negotiations with San Bernardino are subject to a judicial gag order.

The move is significant because all the capital market creditors have so far supported the bankruptcy and it signals a change in course, speaking to the wider fight between Wall Street and pension funds over how they are treated in municipal bankruptcies.

San Bernardino declared bankruptcy in July of 2012.

Moody’s: Stockton Ruling Good News For “Financial Profile” of CalPERS

Moody’s released a report Wednesday outlining the credit agency’s thoughts on CalPERS in the wake of the Stockton ruling.

The agency affirmed CalPERS’ rating of Aa2, which is the third-highest rating available. From the report:

Favorable outcomes for CalPERS in the Stockton, CA and San Bernardino, CA bankruptcy proceedings lend further support to CalPERS improving financial profile because it reduces the likelihood that other CalPERS contracting employers will race to declare bankruptcy to reduce growing pension liabilities. The combination of a reduction in the likelihood that other distressed California municipalities will pursue bankruptcy to reduce pension liabilities and contribution rate increases on contracting employers in each of the last three years should improve the CalPERS funded status and its ability to cover the expected longer lives of retirees.

San Bernardino Sets Aside $10.6 Million To Repay CalPERS

When San Bernardino went bankrupt, it stopped paying its creditors, including its biggest one: CalPERS.

It suspended pension payments to the country’s biggest retirement system for a full year – those payments totaled $13.6 million.

Now, the debts have come due: San Bernardino will set aside $10.6 million from its budget this fiscal year to pay back CalPERS.

From Reuters:

Bankrupt San Bernardino has begun repaying millions in arrears to the California Public Employees’ Retirement System (Calpers) in a deal that has ended an acrimonious relationship between the California city and its biggest creditor.

San Bernardino has set aside $10.6 million in its current budget, which has yet to be published, to pay an unnamed creditor. A senior city source, speaking on the condition of anonymity because details of the Calpers deal are subject to a judicial gag order, confirmed that creditor is Calpers.

San Bernardino suspended the payment of debts to all creditors when it declared bankruptcy. Its decision to strike a deal with Calpers first, and begin paying arrears before a bankruptcy exit plan could be formulated, shows the reluctance of California cities to take on the pension giant, which insists that it must always be paid in full, even in a bankruptcy.

The city declared bankruptcy in August 2012 and suspended its employer payments to Calpers for an entire year after entering Chapter 9 protection, running up principal arrears of $13.5 million, according to Calpers.

San Bernardino began monthly payments of between $600,000 and $700,000 to Calpers in July, according to the source. A second official, budget officer for the city Dixon Mutadzakupa, confirmed that arrears payments to Calpers had begun.

It wasn’t clear whether the city was only on the hook for $10.6 million. If that were the case, San Bernardino would only be paying CalPERS 80 percent of what it owes.

It’s also possible the city could pay the remaining $3 million during the next fiscal year.