The city of San Bernardino has missed making payments of more than a million dollars a month to its employee pension plan since July, when the city first declared its fiscal emergency.
That non-payment is part the city's plan to show a bankruptcy court judge how it will close a deficit of nearly $46 million and restore the city to solvency.
The San Bernardino City Council decided Monday to not direct nearly $13 million it would normally have paid this fiscal year into California's public employee retirement system, known as CalPERS.
The city is already $6.9 million in arrears, the most any California city has fallen behind in recent months, said CalPERS spokeswoman Amy Norris. She was not immediately able to say if other municipalities have gone deeper into debt to CalPERS in past years, so it's difficult to put San Bernardino's non-payment into historical context.
CalPERS responded to the plan Wednesday by asking the judge who's monitoring the city's bankruptcy case to let it sue the city for payment. Normally, a city that files for bankruptcy would be shielded from lawsuits while it restructures its finances.
Mayor Pat Morris said insolvent San Bernardino had no choice but to temporarily halt paying into the pension plan.
"We have to first of all keep our essential services alive to protect our community and deliver those baseline services and doing that is taking all of our resources, it's that simple," Morris said.
The city had negotiated with CalPERS to try and arrange a different payment schedule and to pay interest on the mounting debt, Morris said. The agency manages pension funds for about 3,000 current and future retirees.
Morris says the city plans to pay up eventually, and does not want CalPERS -- which he described as a good partner to the city -- to drop or terminate the city's pension business.
"We're a member of the family in acute distress, and we're hoping that here in the ER room they will be one of the doctors who will help us through this and not an assassin," the mayor said.
Rising public employee pension costs worry other California cities, and some might be tempted to copy San Bernardino's strategy, said Karol Denniston, a San Francisco attorney who helped write the state's process for cities to declare bankruptcy.
"It matters to every municipality in California that's looking at having cash flow challenges and not been able to make their CalPERS payments either now or in the future," Denniston said.
She said California cities and financial industry players are closely watching the San Bernardino case to see whether the federal bankruptcy court will permit the city to pay CalPERS less than its contract called for, something that California law appears to forbid.
A bankruptcy judge would also decide whether CalPERS gets top priority, or must stand in line for payment behind other creditors.
Municipal bankruptcies are so rare that those issues have never before been decided in court, Denniston said. If San Bernardino can alter the terms or timetable of its pension payments, other cities might follow.
"We have over 450 municipalities in California right now. A good number of them are looking at struggling to make their CalPERS payments," she said.
While only three other California cities -- Stockton, Mammoth Lakes and Vallejo -- have declared bankruptcy in recent years -- none had withheld payments to CalPERS, said agency spokeswoman Norris.
In September, Compton tried the tactic. It had fallen about $3 million behind in its pension payments, Norris said. But CalPERS sued, and Compton has since made up the shortfall.