The city of San Bernardino, in Chapter 9 bankruptcy since August 2013, announced two months ago it would honor its pension commitments and pay back the California Public Employees’ Retirement System (CalPERS) money it had withheld in its darkest days.

That made employees and retirees happy, and bondholders sad. Earlier this week, a Luxembourg bank sued the city in U.S. Bankruptcy Court in Riverside for equal treatment of its $50-million in pension obligation bonds. If CalPERS is made whole, the bank wants the city’s entire debt paid.

San Bernardino said it would pay its annual $24-million CalPERS bill and start repaying millions more. Erste Europaische Pfandbrief- und Kommunalkreditbank AG wants that decision to be made by a judge. The bank was joined in the lawsuit by Ambac Assurance Corp., a New York bond insurer.

California’s Constitution explicitly protects pension funds but a federal bankruptcy judge said he wasn’t bound by that in determining Stockton’s fate last year. But, then, he didn’t mess with them while debt holders received 12 cents on the dollar.

The judge said putting a hurt on the pension would further devastate an already devastated community. CalPERS has said that any reduction in payments from San Bernardino would force reduced pension payouts. Current and future retirees would face poverty. Who would want to work there, including police and firefighters? Bondholders are appealing his decision.

A bankruptcy judge allowed Detroit to cut pension benefits 4.5% last month, which violated a state law. A few retirees appealed but it’s considered a long shot because bankruptcy restructuring plans are rarely overturned on appeal. All parties agreed to the cuts to avert further disaster.

CalPERS, for its part, fought hard against Stockton and San Bernardino attempts to reduce their retirement obligations in bankruptcy, fearing that the precedent would encourage other cities stressed by the Great Recession to follow suit. The economy has since improved and reduced that immediate threat, but it’s not surprising that the issue is still a hot one.

“It’s not breaking news to me that a Wall Street bank would do everything it can to get more money, and would have little or no regard for anyone else’s situation,” Dave Low, of Californians for Retirement Security, told the Sacramento Bee.

–Ken Broder

To Learn More:

Pension Bondholder Sues San Bernardino (by Ryan Hagen, San Bernardino Sun)

Creditors Launch Challenge to CalPERS, Pensions in San Bernardino Bankruptcy (by Dale Kasler, Sacramento Bee)

Bondholder Sues Bankrupt San Bernardino for Favoring Calpers (by Tim Reid, Reuters)

Luxembourg Bank Sues over Payments on San Bernardino’s Bonds (by Katy Stech, Wall Street Journal)

San Bernardino Sued for Favoring Pensions over Bondholders (by Steven Church, BloombergBusinessweek)

Judge Gives San Bernardino Bankruptcy Protection, Then Takes Aim at Pension Fund (by Ken Broder, AllGov California)

Judge Who Said He Could Whack Pension in Stockton Bankruptcy Doesn’t Do It (by Ken Broder, AllGov California)