(Reuters) - A high-stakes showdown pitting California’s public employee pension fund against Wall Street bond firms in bankrupt San Bernardino, California, could be further complicated by wildly disparate estimates of how much the city owes for its retirees.
San Bernardino, a city of about 210,000 near Los Angeles that filed for bankruptcy on August 1, has listed the California Public Employees’ Retirement System (Calpers) as its largest creditor, with unfunded pension obligations totaling $143.3 million. But Calpers, in response to an inquiry from Reuters, pegged the debt at $319.5 million.
Experts say the dramatically different calculations of San Bernardino’s debt to Calpers will likely lead to litigation between the two entities, unless the city quickly agrees to the retirement system’s figure.
Calpers is the largest pension system in the U.S. and serves many California cities and counties, including the city of Stockton, which is also in bankruptcy. It has long argued that pension contributions cannot be touched even in a bankruptcy.
But firms that insure municipal bonds have strenuously objected to the idea that pension payments should come ahead of bond payments. They have already gone to court on the issue in Stockton and are expected to do the same in San Bernardino.
The outcome of how Calpers and bondholders are treated as creditors in the two cities’ bankruptcies - and whether Calpers receives preferential treatment - will have broad implications for local governments around the country that are struggling to balance their budgets amid soaring employee retirement costs.
The day after San Bernardino’s filing the city’s mayor, Patrick Morris, told Reuters the city was bankrupt because it was buried under pension debt.
San Bernardino’s unfunded obligation to Calpers is the amount the city would have to pay to the organization to cover all current and future pension obligations if the city had to settle those overnight.
At the request of Reuters, Calpers analyzed its database and said that San Bernardino’s unfunded obligations to the agency were more that double the city’s assessment - $319.5 million.
Calpers’s figure was split between $187.1 million for the pension costs of San Bernardino’s safety workers - essentially its police and firefighters - and $132.4 million for the city’s non-safety workforce.
A Calpers official said it appears that San Bernardino had used an “actuarial” value in determining its unfunded pension obligation, while the pension fund said it uses the current market value to make its calculation.
An actuarial value is a long-term, projected calculation that factors in predicted value of assets, potential future returns on investments and other economic data in determining what a city’s pension obligation will be.
Officials at Calpers insist that the correct method to use for the purposes of the bankruptcy filing is the much higher “market value” calculation.
Karol Denniston, a San Francisco lawyer who helped draft California’s bankruptcy process law, said whatever method San Bernardino and Calpers used to calculate pension obligations, the fact they are so wildly different spelled trouble.
When it comes to negotiating pension costs during the bankruptcy, Denniston said, “if Calpers views the number that differently, that is going to be an impediment to any sort of settlement. That claim amount will get litigated.”
Morris, San Bernardino’s mayor, agreed. “There will be trouble if you can’t agree on the basic facts,” he said.
Morris referred Reuters to the city’s finance office for an explanation of how it reached its pension cost figure. Repeated calls there, and to the city manager’s office, were not returned. Calls to the bankruptcy attorney representing the city also went unanswered.
The two California bankruptcy cases are being closely watched by investors and markets. They will be major test cases of whether cities in financial trouble can be allowed to renege on their bond debt and pension obligations - and in what order.
Richard Larkin, senior vice president and director of credit analysis at bond underwriting firm HJ Sims, said he expects bondholders to take on Calpers in the case of San Bernardino, which could lead to large scale litigation.
“As a bondholder, I‘m going to want to keep other creditors’ numbers as low as possible,” Larkin said. “The other creditors are going to try and overturn Calpers’s claim. I would say Calpers’s calculations are wrong.”
Litigation between Calpers and San Bernardino’s other creditors, especially bondholders, was likely, Larkin said, because the case will have huge implications and set precedent for any future city bankruptcies.
Already in Stockton, two bond insurers are arguing that the city’s failure to ask for concessions from Calpers showed the city had not negotiated in good faith with other creditors and its bankruptcy request should not be granted because it does not touch pensions.
In a statement, Calpers argued that California law dictates that it be given “priority” over bond creditors and that municipalities must meet their obligations to the pension system in full.
“Simply put, Calpers is an arm of the State of California and different laws apply to the relationship between Calpers and a municipality,” Calpers said.
“Although bondholders and bond insurers have argued that they are ‘similarly situated’ with Calpers and its members, this is not true.”
John Moorlach, chairman of the Orange County Board of Supervisors and one of the officials who oversaw that California county’s bankruptcy in 1994 - at the time the largest U.S. county to go bankrupt - said bondholders would be “nuts” not to take on Calpers now.
“The bondholders have got to take on Calpers,” Moorlach said. “If they don’t Calpers will just run them over.”
Reporting By Tim Reid; Editing by Jonathan Weber and Phil Berlowitz