San Bernardino, the bankrupt California city, was sued for keeping up payments to CalPERS without giving equal treatment to pension bondholders, a conflict facing other struggling U.S. municipalities.
The lawsuit presents a novel legal challenge for the $295.6 billion California Public Employees' Retirement System, Sacramento, which last year lost an argument in federal court over whether it deserved more protection than Wall Street.
Pension bondholder Erste Europaische Pfandbrief-und Kommunalkreditbank AG sued San Bernardino on Wednesday in federal bankruptcy court in Riverside, Calif., 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, said in the suit.
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.
San Bernardino and Stockton, Calif., filed bankruptcy within weeks of each other in 2012, each partly blaming the high cost of union contracts.
San Bernardino initially quit paying CalPERS, later resuming the monthly payments after cutting a deal. Stockton kept up the payments and declined to challenge CalPERS' legal claim that it must be paid before bondholders.
Investors challenged Stockton's decision, and last year a federal judge agreed with one of their key arguments, that CalPERS was no different from any other unsecured creditor.
CalPERS says it disagrees with that ruling. It is reviewing Wednesday's lawsuit, said Brad Pacheco, a CalPERS spokesman.
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 lawsuit.
Ambac Assurance Corp., which insured part of the pension debt, joined Erste Europaische in suing the city.