Pension bondholders can't force the bankrupt California city of San Bernardino to pay them as much as the state's powerful retirement system, a judge ruled Monday.
U.S. Bankruptcy Judge Meredith Jury acknowledged that her decision is likely to be seen as unfair to the municipal bond market and might even discourage investors from buying pension obligation bonds in the future.
“What I see as unfair and might seem unfair to the outside world does not matter under law,” Ms. Jury said. She said there was no legal way to force bondholder debt to be repaid exactly as monthly pension dues owed to the $305.3 billion California Public Employees' Retirement System, Sacramento.
In January, bondholders sued San Bernardino in federal court, seeking to convince Ms. Jury that their debt must be given equal repayment status as the city's payments to CalPERS.
San Bernardino filed bankruptcy in 2012, blaming the high cost of fire and police contracts, including pensions. Since then, the city has battled fire and police unions over its plan to impose cuts.
Ms. Jury's ruling came after she gave the bondholders' lawyers a chance to argue for a different result at a hearing on Monday in Riverside, Calif.
To get permission to issue the pension bonds in 2005, the city got 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 Ms. Jury. That ruling means the bond debt should be treated the same as any city debt owed to CalPERS, Mr. Marriott said.
Ms. Jury disagreed.
By the end of May, the city must file a plan to reduce its debt, including imposing cuts on employees and bondholders.