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Bankrupt California city to resume paying pension fund, but not bondholders

A sign advertising bankruptcy filing is seen hanging off a road sign in San Bernardino, California September 11, 2012. REUTERS/Lucy Nicholso
A sign advertising bankruptcy filing is seen hanging off a road sign in San Bernardino, California September 11, 2012. REUTERS/Lucy Nicholso

By Tim Reid

LOS ANGELES (Reuters) - Bankrupt San Bernardino will resume paying into the state pension fund on July 1, but the California city will continue to renege on other debts including payments to bondholders, according to a new budget released late Thursday.

Nearly a year after it halted contributions to America's biggest pension fund, San Bernardino will resume payments to Calpers at the start of the new fiscal year - but continue to not pay other creditors, according to the budget.

San Bernardino will not make interest and principal payments on $50 million in pension bonds issued in 2005, according to the new budget. The city council on Monday will review the budget, a blueprint for how the city proposes to manage its finances since declaring bankruptcy last August.

San Bernardino's decision to resume its $1.2 million, bimonthly employer contributions to Calpers while continuing to defer pension bond debt will intensify the battle between the pension fund and Wall Street bondholders.

The case has been bogged down in disputes about the scope of documents the city must provide to its creditors. Unlike Stockton, where a judge approved the city for bankruptcy last week, a decision on San Bernardino's eligibility for Chapter 9 protection still appears some way off.

Both San Bernardino and Stockton are considered test cases in the titanic battle over whether municipal bondholders or current and retired employees will absorb most of the pain when a state or local government goes broke.

Calpers, which manages $256 billion in assets, is San Bernardino's biggest creditor, with the holders of its $50 million in pension bonds its second-biggest creditor.

Calpers is opposing San Bernardino's quest for bankruptcy, the only city to have ever halted payments to the fund. Stockton kept current on its payments to Calpers and the pension fund did not oppose that city's bid for Chapter 9 protection.

There is no mention in the budget of how the city intends to repay its arrears to Calpers, and other creditors.

In a letter attached to the new financial documents, officials say roughly $35 million has been "deferred" by the city - that is, not paid to creditors.

After the city said in court on Tuesday that it hoped to restart payments to Calpers, the pension fund told Reuters that such a move would be a "smart business decision."

The budget message was sober in the sacrifices it says the city will continue to have to make in order to bring its fiscal house in order.

While the new budget predicts slightly more revenues than expenditures for the city's general fund by the end of this fiscal year - by about $2.3 million - it states that at the end of June this year, despite salary reductions, staff cutbacks and other drastic cost-cutting measures, the general fund will still be nearly $7 million in the red.

"The City's overall cash balance and liquidity is the City's biggest challenge," the budget document states. It calls the city's cash-on-hand position "extremely serious."

(Reporting by Tim Reid; Editing by Lisa Shumaker)

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