(Bloomberg) — California's public retirement fund holds so much power over local officials that pension bond investors can't expect equal treatment when a city goes bankrupt, a judge said in a ruling that she acknowledged seems "unfair."
U.S. Bankruptcy Judge Meredith Jury on Monday threw out a lawsuit in which investors had claimed their pension bonds must be paid off at the same rate as the California Public Employees' Retirement System in a municipal bankruptcy. The $304 billion fund is the biggest in the country.
Jury acknowledged that her decision could discourage investors from buying pension-obligation bonds in the future.
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"What I see as unfair, and might seem unfair to the outside world, does not matter under law," Jury said.
San Bernardino filed for bankruptcy in 2012, blaming the high cost of fire and police labor contracts, including pensions. At first, officials balked at paying Calpers before other creditors. After months of mediation, the city agreed to repay Calpers in full and maintain normal monthly contributions on behalf of its employees.
Pension-bond holder Erste Europaische Pfandbrief & Kommunalkreditbank AG sued San Bernardino in bankruptcy court in Riverside, California, claiming equal status with Calpers. The Luxembourg bank holds about $50 million in pension obligation bonds.
Existing liability
To get permission to issue the pension bonds in 2005, the city obtained a court ruling that it wasn't creating new debt but simply using the bonds to repay an existing Calpers liability, bondholder attorney Vincent J. Marriott told Jury Monday. That ruling means the bond debt should be treated the same as any debt owed to Calpers, Marriott said.
Jury disagreed.
One of the biggest differences between pension bondholders and Calpers is simple power, Jury said. If Calpers isn't paid, it can reduce pension payments to a city's employees, she told Marriott. Bondholders don't have that kind of legal remedy, according to the judge.
"We feel the judge made the absolute right decision," Calpers spokeswoman Rosanna Westmoreland said in a phone interview. "Now San Bernardino can get on to working on their path forward."
Stockton ruling
A federal judge approved cuts to bondholders in the bankruptcy of the Northern California city of Stockton, while allowing the city to fully repay Calpers. The judge ruled that Stockton could have tried to impose cuts on Calpers also because pension debt is unsecured, meaning it has the same general priority as other debt that's not backed by collateral.
The city argued that fighting Calpers would take too long and could endanger employee pensions.
San Bernardino bondholders could know exactly how much the city plans to pay them by the end of May, when its debt-cutting plan is due.
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