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MICHAEL J. GEARIN (admitted pro hac vice) MICHAEL B. LUBIC (SBN 122591) K&L GATES LLP 10100 Santa Monica Boulevard, Seventh Floor Los Angeles, California 90067 Telephone: 310.552.5000 Facsimile: 310.552.5001 Email: michael.lubic@klgates.com michael.gearin@klgates.com Attorneys for California Public Employees Retirement System UNITED STATES BANKRUPTCY COURT CENTRAL DISTRICT OF CALIFORNIA

9 RIVERSIDE DIVISION 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 In re CITY OF SAN BERNARDINO, CALIFORNIA, Debtor. PRELIMINARY OBJECTION OF CALPERS TO THE CITY OF SAN BERNARDINOS CHAPTER 9 PETITION AND REQUEST FOR RELIEF UNDER 11 U.S.C. 941 Date: Time: Place: November 5, 2012 10:00 a.m. United States Bankruptcy Court 3420 Twelfth Street Courtroom 301 Riverside, CA 92501 Case No. 6:12-bk-28006 MJ Chapter 9

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1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 IV. III. I. II.

Page INTRODUCTION ..................................................................................................................... 1 BACKGROUND ....................................................................................................................... 2 A. B. C. D. E. The Bankruptcy Filing.................................................................................................... 2 The Citys Financial Records Are in Disarray ............................................................... 3 The Pre-Pendency Plan................................................................................................... 4 Ongoing Financial Performance..................................................................................... 5 CalPERS is the Citys Largest Creditor ......................................................................... 6

ARGUMENT ............................................................................................................................. 7 A. B. C. D. The City Cannot Demonstrate a Desire to Effect a Plan............................................. 8 The City Cannot, at this Time, Demonstrate that it Filed its Petition in Good Faith ............................................................................................................................ 10 Request for Relief Under Section 941.......................................................................... 12 CalPERS Reserves the Right to Object to the Citys Eligibility on Other Grounds. ....................................................................................................................... 13

CONCLUSION ........................................................................................................................ 13

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Page FEDERAL CASES CalPERS v. Moodys Corp., Nos. C09-03628 SI, C09-03629 JCS, 2009 WL 3809816 (N.D. Cal. Nov. 10, 2009) .............. 6 Kaplan v. CalPERS, 1999 WL 33623292, No. 99-15295 (9th Cir. Aug. 12, 1999)....................................................................................... 6 Loop Corp. v. United States Trustee, 379 F.3d 511 (8th Cir. 2004)..................................................................................................... 12 STATE CASES Cal. Ass'n of Profl Scientists v. Schwarzenegger, 137 Cal. App. 4th 371 (2006) .................................................................................................... 6 City of Oakland v. Pub. Emps. Ret. Sys., 95 Cal. App. 4th 29 (2002) ........................................................................................................ 6 In re City of Bridgeport, 129 B.R. 332 (Bankr. D. Conn. 1991) ..................................................................................... 10 In re City of Vallejo, 408 B.R. 280 (9th Cir. BAP 2009)..................................................................................... 7, 8, 9 In re Cottonwood Water & Sanitation Dist., 138 B.R. 973 (Bankr. D. Colo. 1992) ........................................................................................ 7 In re N.Y.C. Off-Track Betting Corp., 427 B.R. 256 (Bankr. S.D.N.Y. 2010) ................................................................. 7, 9, 10, 11, 12 In re Orange County, 183 B.R. 594 (Bankr. C.D. Cal. 1995)....................................................................................... 8 In re Pierce Cnty. Hous. Auth., 414 B.R. 702 (Bankr. W.D. Wash. 2009) ................................................................................ 13 In re Suffolk Regl Off-Track Betting Corp., 462 B.R. 397, (Bankr. E.D.N.Y. 2011) ............................................................................................................. 7 In re Sullivan County Regl Refuse Disposal Dist., 165 B.R. 60 (Bankr. D.N.H. 1994) ............................................................................ 7, 8, 10, 11 In re Town of Westlake, Texas, 211 B.R. 860 (Bankr. N.D. Tex. 1997) ...................................................................................... 8 In re Villages at Castle Rock Metro Dist. No. 4, 145 B.R. 76 (Bankr. D. Colo. 1990) ........................................................................................ 11 In re Wright Air Lines, Inc., 51 B.R. 96 (Bankr. N.D. Ohio 1985) ....................................................................................... 12 FEDERAL STATUTES 11 U.S.C. 109(c) ................................................................................................................................. 7 11 U.S.C. 109(c)(1)-(5)................................................................................................... 7, 8, 9, 10, 13 11 U.S.C. 109(c)(5)(C) ..................................................................................................................... 13 -ii-

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11 U.S.C. 1112(b) ............................................................................................................................. 12 11 U.S.C. 1112(b)(1)......................................................................................................................... 12 11 U.S.C. 921(c) ....................................................................................................................... 7, 9, 10 11 U.S.C. 930 .................................................................................................................................... 12 11 U.S.C. 930(a)(2)........................................................................................................................... 12 11 U.S.C. 930(a)(3)........................................................................................................................... 12 11 U.S.C. 941 .............................................................................................................................. 12, 13 STATE STATUTES CAL. GOV. CODE 20000....................................................................................................................... 6 CAL. GOV. CODE 20001....................................................................................................................... 6 OTHER AUTHORITIES California Public Employees Retirement System, Office of Public Affairs, Facts at a Glance: General (2012) ........................................................................................................................... 6

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The California Public Employees Retirement System (CalPERS), by and through its undersigned attorneys, hereby submits this preliminary objection to the chapter 9 petition (the Petition) of the City of San Bernardino (the City) and respectfully requests that the Court set a deadline under Section 9411 for the City to submit its proposed plan of adjustment and continue the status conference on eligibility to allow sufficient time to review the plan. I. Introduction

The City appears to be operating postpetition at a substantial deficit and has so far been unable to produce a budget that covers its ongoing operating expenses, let alone allows it to pay any prepetition claims. Accordingly, CalPERS believes that it is premature for the Court to consider eligibility. In filing this preliminary objection, the goal of CalPERS is not to start a costly battle over eligibility but rather to defer any dispute about eligibility until the City has produced credible projections which could form the basis of a feasible plan. As set forth in the Citys initial pleadings filed in the case, the City filed its Petition under extreme duress. At the time of the bankruptcy filing, it appears as though the City had no unassigned or un-restricted funds available to service its operations. The City declared a fiscal emergency and, without negotiations with its creditors regarding a potential plan of adjustment, hastily sought the haven of bankruptcy. Subsequently, the City proposed a short term unbalanced budget and operating plan. The City has failed to operate in accordance with its plan and appears to be operating at a significant deficit. Its obligations to CalPERS, trade creditors, and other creditors are accruing rapidly. The City has not proposed a balanced budget for approval by its City Council and has not filed a pendency plan to support its allegation that it desires to effect a plan to adjust its debts. At this point in the case, it is impossible to determine whether the City meets the eligibility requirements of chapter 9 because, despite its previous promises, the City has failed to provide interested parties with reliable financial information and a purported plan upon which to evaluate the Citys legitimate desire to effect a plan of adjustment. Before any determination is made on the

Unless otherwise indicated, all statutory references are to Title 11 of the United States Code.

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Citys eligibility for chapter 9 protection, the City should be required to present the Court and the interested parties with a plan of adjustment, including realistic projections of revenues and expenses. II. A. The Bankruptcy Filing Background

On July 18, 2012, the City declared a fiscal emergency and determined that it would be unable to pay its debts, including payroll obligations, within the subsequent sixty days. See Resolution No. 2012-205 & 206 (attached as Exhibits G & H to Declaration of Georgeann Hanna in Support of City of San Bernardinos Memorandum of Facts and Law in Support of the Statement of Qualifications Under Section 109(c) of the Bankruptcy Code [Docket No. 129] (the Hanna Declaration)). Previously, the Citys Finance Department issued a budget report concluding, inter alia, that: (1) the City faced a budget deficit preliminarily estimated to be over $45.8 million in its current fiscal year; (2) the City had depleted all of its General Fund reserves and reserves in its internal service fund accounts and other funds to cover substantial budget deficits in the last four consecutive fiscal years; (3) immediate and substantial action had to be taken to reduce spending and preserve cash for the City to continue to provide essential services to the Citys residents; (4) reviews of the Citys General Fund revealed that the balances at the start of the 2010-11 and 2011-12 fiscal years had been erroneously reported by City staff and actually totaled over $4.5 million less than reported, and that the beginning General Fund balance for the current fiscal year was estimated to be a cash deficit of over $18.2 million; and (5) the City did not have enough unrestricted cash or any reserves available to pay its financial obligations as and when those obligations were due or to become due beginning in July of 2012 and continuing through the remainder of the current fiscal year and beyond. See City of San Bernardinos Memorandum of Facts and Law in Support of Qualifications Under Section 109(c) of the Bankruptcy Code [Docket No. # 125] (Citys Memorandum), at 3-4 (footnotes omitted). The City alleges that [i]n order to preserve enough cash to meet its August payroll obligations and provide essential services through the end of September assuming that a Chapter 9 case would be filed, the City approved [a] Fiscal Emergency Plan on July 24, 2012[,] and deferred payments totaling over $6 million. Id. at 6-7.

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B.

The Citys Financial Records Are in Disarray

The Citys fiscal emergency did not arise overnight. The City alleges that, as recently as April 2012, the former City Manager believed that that the Citys estimated budget shortfall for fiscal year 2011-12 would be about $3.1 million which the City believed could be remedied by additional cuts to department budgets, continuing a hiring freeze on filling vacant positions and making revenue adjustments. Declaration of Andrea Travis-Miller in Support of City of San Bernardinos Memorandum of Facts and Law in Support of the Statement of Qualifications Under Section 109(c) of the Bankruptcy Code [Docket No. 126] (the Travis-Miller Declaration), 5. According to the Citys current Director of Finance, who began working in his current position on March 28, 2012, the monthly reconciliation of the bank statements for the Citys bank accounts to the Citys ledgers for the General Fund account had not been done since June 30, 2011 and was nine months behind schedule, and the financial audit for the 2010-11 fiscal year had not been completed [when he took over as Director of Finance]. Declaration of Jason P. Simpson in Support of City of San Bernardinos Memorandum of Facts and Law in Support of the Statement of Qualifications Under Section 109(c) of the Bankruptcy Code [Docket No. 127] (the Simpson Declaration), 6. In connection with analyzing the status of the Citys reserves and the Citys budgets from 2007, the Director of Finance discovered that the budget shortfall from the prior fiscal year was $6.3 million more than previously reported and the Citys fund balance was actually negative $1.2 million as of June 30, 2011 (as opposed to a positive $2.0 million previously reported), and he forecasted a negative $10.6 million balance as of June 30, 2012. Id. The Citys publicly-available financial reports, however, focus on the impact of the recession pending since 2008 while only casually mentioning these financial reporting and budgeting problems. See City of San Bernardino Budgetary Analysis and Recommendations for Budget Stabilization dated July 9, 2012,2 at 1 (executive summary mentioning accounting errors among a variety of issues causing the City to face insolvency).

Attached as Exhibit B to Hanna Declaration. -3-

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After filing the Petition on August 1, 2012 (the Petition Date), the City began developing a Pendency Plan designed to result in an eventual plan of adjustment of its debts in this case. Citys Memorandum at 30. More than two and a half months after the filing of the bankruptcy case, the City has not yet filed or communicated its pendency plan to parties in interest. C. The Pre-Pendency Plan

On August 29, 2012, a Pre-Pendency Plan3 was presented to the City Council. The PrePendency Plan proposed a variety of cost-reductions in an effort to address the Citys cash shortfall, but does not proposed a balanced budget for ongoing operations. See also, Simpson Declaration 16 (The City does not have a balanced budget for its current fiscal year). With respect to CalPERS expenditures, the Pre-Pendency Plan sets forth the following assumption: CalPERS costs are driven by the States actuarial report that includes a 0.5% lower CalPERS discount rate for investment earnings which contributes to a 14.4% increase in costs for FY 2012-13 and a 4.6% increase from FY 2012-13 to FY 2013-14. Lower City payroll will drive up part of the CalPERS liability rate that pays off the unfunded liability. The major risk is additional reductions in the discount rate and/or CalPERS investment performance, which would drive employer rates up further. Future labor negotiations or court rulings could result in changes to the Citys costs related to retirement benefits. Pre-Pendency Plan at 39. The Pre-Pendency Plan appears to contemplate reduced payments to CalPERS going forward on account of reduced payroll obligations resulting from headcount reductions, driving up the contribution rate needed to amortize unfunded liability in light of the reduced payroll. The Pre-Pendency Plan indicated that the City would continue making its required payments to CalPERS. This understanding was confirmed to CalPERS by the City shortly after the PrePendency Plan was make public. Consequently, CalPERS expected that the City intended to continue making its required payments to CalPERS.

Available at http://www.ci.san-bernardino.ca.us/civica/filebank/blobdload.asp?BlobID=14136, and attached hereto as Exhibit A.

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D.

Ongoing Financial Performance

Recently, however, CalPERS has learned that, contrary to the Pre-Pendency Plan, the City has failed to make certain required payments to CalPERS. Indeed, it now appears that the City knew it was not making these payments when it issued the Pre-Pendency Plan. Further, CalPERS has been informed, but has not yet verified, that the City has not made substantially all of the personnel cuts approved by the City Council and which form the basis for the Pre-Pendency Plan. Since the Petition Date, the City has made certain cash flow reports available to the public though its website.4 The most recent cash flow report, dated October 8, 2012 (the October 8 Cash Report),5 states that the City has increased its cash position by $8,545,520 since the Petition Date, but notes that the increase in cash is primarily due to deferral of currently due obligations totaling ($23,578,368) including payments due to bond holders, CalPERS, trade payables, prior litigation costs, and employee leave bank cashouts. Indeed, the October 8 Cash Report sets forth five missed biweekly payments to CalPERS, four of which relate to postpetition pay periods, totaling in excess of $5.2 million.6 The October 8 Cash Report contemplated a $1,035,000 payment to CalPERS on account of the pay-period ending October 15, but that payment has not been received by CalPERS. Similarly disconcerting when attempting to evaluate the Citys going-forward viability is that unpaid trade payables have ballooned postpetition by more than $3 million since the Petition Date. See September 4 Cash Report7 (disclosing $5,054,206 in unpaid trade payables as of July 31) and October 8 Cash Report (disclosing $8,150,364 in unpaid trade payables as of October 8).

Available at http://www.ci.san-bernardino.ca.us/home_nav/chapter_9_bankruptcy/default.asp.

Available at http://www.ci.san-bernardino.ca.us/civica/filebank/blobdload.asp?BlobID=14299, and attached hereto as Exhibit B. Based on CalPERS' calculations, since the Petition date the City has made payments to CalPERS totaling approximately $2.7 million. The City has represented that it paying in full all of the employee contributed share of pension obligations to CalPERS, but that it is deferring payment of the employers share. Available at http://www.ci.san-bernardino.ca.us/civica/filebank/blobdload.asp?BlobID=14226, and attached hereto as Exhibit C. -57 6

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It appears that the City is financing its postpetition operating deficit by incurring postpetition obligations and simply not paying its postpetition bills. The City is digging a hole that gets deeper every day and there is nothing in the record that suggests that the City will be able to pay in full these administrative expenses, which is a prerequisite to plan confirmation. E. CalPERS is the Citys Largest Creditor

CalPERS is an arm of the state,8 and as such enjoys the sovereign rights of the State of California. The Public Employees Retirement Law (CAL. GOV. CODE, 20000 et seq.) (PERL) establishes a retirement system for certain state and local government employees. City of Oakland v. Pub. Emps. Ret. Sys., 95 Cal. App. 4th 29, 33 (2002). The purpose of the PERL is to effect economy and efficiency in the public service by providing a pension plan to pay retirement compensation and death benefits. CAL. GOV. CODE 20001. The California Legislature established CalPERS in 1931, and the system became operational in 1932 when it began providing retirement benefits to California State employees. California Public Employees Retirement System, Office of Public Affairs, Facts at a Glance: General (2012).9 CalPERS provides pension fund and healthcare services for approximately 1.6 million California public employees, retirees, and their families. Id. A state employee generally becomes a member of the Public Employees' Retirement System ... upon his or her entry into employment. Cal. Ass'n of Profl Scientists v. Schwarzenegger, 137 Cal. App. 4th 371, 376 (2006) (citations omitted). Local government employers may enter into a relationship with CalPERS to provide pension and retirement benefits to their employees. The City has contracted to participate in the California Public Employees Retirement System.

See, e.g., CalPERS v. Moodys Corp., Nos. C09-03628 SI, C09-03629 JCS, 2009 WL 3809816 at * 6 (N.D. Cal. Nov. 10, 2009) (citing cases). In fact, the State of California agrees with this conclusion. See also Brief filed by California State Attorney Generals Office in Kaplan v. CalPERS, 1999 WL 33623292, No. 99-15295 (9th Cir. Aug. 12, 1999) at 8 n.2 (The California Public Employees Retirement System is an arm of the State.); accord Kaplan v. CalPERS, 221 F.3d 1348 (9th Cir. 2000) (unpublished) (holding Eleventh Amendment barred suit against CalPERS under the ADEA).
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Available at http://www.calpers.ca.gov/eip-docs/about/facts/general.pdf, and attached hereto as Exhibit D. -6-

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The City lists CalPERS as its largest unsecured creditor with a prepetition claim in excess of $143 million. See List of Creditors Holding 20 Largest Unsecured Claims [Docket No. 41]. The City asserts that this amount constitutes the book value of the Citys unfunded CalPERS liability, but submits that the market value of the obligation is $319.5 million. See Citys Memorandum at 14. III. Argument

The decision to file a chapter 9 petition is one of last resort and should only occur after an out-of-court attempt to avoid bankruptcy has failed. In re Sullivan County Regl Refuse Disposal Dist., 165 B.R. 60, 82 (Bankr. D.N.H. 1994) (citation and quotation omitted). This is so because, given Tenth Amendment and sovereignty concerns, the bankruptcy court has very little control over the actions of a debtor once a chapter 9 petition is approved. Id. at 82; see also In re N.Y.C. OffTrack Betting Corp., 427 B.R. 256, 264 (Bankr. S.D.N.Y. 2010) (Bankruptcy courts should review chapter 9 petitions with a jaded eye. Principles of dual sovereignty, deeply embedded in the fabric of this nation and commemorated in the Tenth Amendment of the United States Constitution, severely curtail the power of bankruptcy courts to compel municipalities to act once a petition is approved.) (citation omitted). As a result of these concerns, the Bankruptcy Code imposes several substantial eligibility requirements that the City has the burden of establishing before it can be determined to be eligible for chapter 9 and an order of relief can be granted. In re City of Vallejo, 408 B.R. 280, 289 (9th Cir. BAP 2009) (citing 109(c)(1)-(5)); see also In re N.Y.C. Off-Track, 427 B.R. at 264-65 (In light of these concerns, bankruptcy courts scrutinize petitions for relief under chapter 9.) (citing In re Sullivan, 165 B.R. at 82 & In re Cottonwood Water & Sanitation Dist., 138 B.R. 973, 979 (Bankr. D. Colo. 1992)); In re Suffolk Regl Off-Track Betting Corp., 462 B.R. 397, 414-15 (Bankr. E.D.N.Y. 2011) (citing cases). As explained in more detail below, as it now stands, neither this Court nor CalPERS have been provided sufficient information to determine whether the City has met its burden on eligibility. Indeed, there are serious questions under certain of the 109(c) factors, as well as under 921(c). Consequently, CalPERS respectfully requests that this Court defer any determination regarding eligibility until sufficient information has been made available. The City has represented that it is -7-

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working on a Pendency Plan and that it may be filed as soon as a few weeks from now. At a minimum, determination of eligibility should be deferred until parties in interest have had an opportunity to review this plan. A. The City Cannot Demonstrate a Desire to Effect a Plan.

Under Section 109(c)(4), the City must establish that it desires to effect a plan to adjust its debts. This requirement should be tested as of the date of the petition is filed. In re Town of Westlake, Texas, 211 B.R. 860, 867 (Bankr. N.D. Tex. 1997). As the court in Vallejo observed, given the highly subjective nature of this inquiry, no bright-line test exists to determine whether this element has been established. Vallejo, 408 B.R. at 295 (citing cases). That said, however, this element may be established by attempting to resolve claims or by submitting a draft plan of adjustment. Id. (citing, inter alia, In re Orange County, 183 B.R. 594, 607 (Bankr. C.D. Cal. 1995) & In re Sullivan County). At a minimum, the evidence presented by the City must establish that the purpose of the filing of the chapter 9 petition not simply be to buy time or to evade creditors. Vallejo, 408 B.R. at 295 (quotation and citation omitted). Here, the City has neither sought to resolve claims or put forth a draft plan of adjustment. Consequently, creditors remain in the dark as to the Citys financial circumstances and its plans for adjusting its debts. As of the date of this filing, the City has not prepared or provided either the Court or the parties with its Pendency Plan, although it specifically relied upon such a Plan as evidence of its desire to effect a plan to adjust its debts. See, e.g., Citys Memorandum (As further evidence of the Citys desire to effect a plan to adjust its debts, the City is developing a Pendency Plan designed to result in an eventual plan of adjustment of its debts in this case.) at 30; see also Declaration of Michael Busch in Support of City of San Bernardinos Memorandum of Facts and Law in Support of the Statement of Qualifications Under Section 109(c) of the Bankruptcy Code (the Busch Declaration) [Docket No. 128] at 5 (declaring that Citys consultant, Urban Futures, Inc., is currently assisting the City in developing its Pendency Plan.). Although the City made several promises in its August 31, 2012 submissions to this Court that it was diligently preparing its Pendency Plan, the City has simply not produced the Plan. This raises significant concerns regarding the Citys intentions with respect to the use of the bankruptcy process. See Sullivan County, 165 B.R. -8-

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at 82 (noting that debtors post-filing actions tend to confirm that the bankruptcy option was chosen with no real thought or sincere intention of debt adjustment in an overall plan sense and therefore could not meet the good faith requirement of Section 921(c)). The Citys failure to provide the Court and parties with its Pendency Plan several months into the case, combined with its continued operating deficit and failure to meet its postpetition obligations, raises a serious question of whether its underlying purpose has been merely to buy time and evade creditors. In support of its position, the City relies heavily on the BAPs decision in Vallejo where the court affirmed a finding that Section 109(c)(4) was satisfied where Vallejos postpetition efforts in implementing its Pendency Plan sufficiently demonstrate[d] that its petition was designed to result in an eventual plan of adjustment of debts by which creditors claims would be satisfied or discharged. Vallejo, 408 B.R. at 295. Here, in sharp contrast, the Citys postpetition efforts have so far not resulted in the creation of, let alone the proposed implementation of, a Pendency Plan or any plan that is even facially viable. In addition, given the absence of the Pendency Plan, or any proposed terms, it is impossible to determine whether any proposed plan can be effectuated under chapter 9. Accord Sullivan County, 165 B.R. at 78 (finding that debtors failed to meet good faith requirement of Section 109(c)(5) where proposed plan was not a plan that could be effectuated in chapter 9); see also id. at 77 (noting that the fact that debtors chose to waffle and evade any serious attempt to come up with a feasible plan until some four or five weeks before the filing supported conclusion that good faith requirement of Section 109(c)(5) was not met). Thus, we are all in the dark as to whether any plan proposed by the City could ever be confirmable. In its Qualifying Statement, the City makes much of the fact that the City Manager declared under penalty of perjury that the City desires to effect a plan to adjust its debts. See Citys Memorandum at 29-30. While this may be true, such a statement alone is insufficient to satisfy Section 109(c)(4). See, e.g., Vallejo, 408 B.R. at 295 (noting that such statement, coupled with pre and postpetition negotiations with unions were sufficient to affirm trial courts finding that Section 109(c)(4) was satisfied); see also N.Y.C. Off-Track Betting, 427 B.R. at 272 (Courts examining this requirement have determined that a filed statement indicating intent to affect a plan of reorganization, combined with efforts made towards negotiating and drafting a plan, fulfill this requirement.) -9-

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(emphasis added; citation omitted).10 In short, until the City actually provides the Court and the interested parties with its promised Pendency Plan, any determination that the City has satisfied Section 109(c)(4) is premature. This is all the more important because, as explained above, courts must view chapter 9 petitions with a jaded eye given the lack of control the courts have over municipalities such as the City once they are allowed into chapter 9. B. Faith11. Although the term good faith is not defined in the Bankruptcy Code, such a requirement provides a useful means for the Court to preserve the protection of the Code for those for which it was actually intended. Sullivan County, 165 B.R. at 79-80 (citations omitted). In ascertaining the The City Cannot, at this Time, Demonstrate that it Filed its Petition in Good

At least two federal judges have noted that the City has been less than forthcoming about its financial situation in the past. See, e.g., Declaration of Arthur K. Cunningham In Support of City of San Bernardinos Memorandum of Facts and Law in Support of the Statement of Qualifications Under Section 109(c) of the Bankruptcy Code [Docket No. 130], Exhibit B at 1 (noting that even while City was publically stating its intention to file for bankruptcy, it continued to profess that it has continued to meet its financial obligations to vendors, creditors, and employees and intends to meet those obligations over time.) (quotation omitted); Declaration of Joseph Arias In Support of City of San Bernardinos Memorandum of Facts and Law in Support of the Statement of Qualifications Under Section 109(c) of the Bankruptcy Code [Docket No. 131], Exhibit B at 2-3 (The Citys public statements concerning its fiscal emergency and impending bankruptcy filing states in part: As of this [July 18, 2012], it has continued to meet its financial obligations to vendors, creditors, and employees and intends to continue to meet those obligations over time. This is not true concerning the settlements which in this case, include monies on which two very young children are dependant for their care, support, medical needs, food and housing.) (certain alterations omitted). The Citys statements with respect to its intentions to continue to meet its obligations to CalPERS have likewise proved to be unreliable. The City, without citation to authority, suggests that the burden of proof under 921(c)s good faith requirement rests with the objecting party as opposed to the City. See Citys Memorandum at 35 n.30. This position is incorrect for several reasons. Placing the burden of proof on the objecting party, as opposed to the party asserting its good faith is contrary to longstanding rule that the party seeking relief should bear the burden of proof. See, e.g., In re City of Bridgeport, 129 B.R. 332, 334 (Bankr. D. Conn. 1991) (The general rule is that the burden of proof is imposed upon the party who asserts the affirmative of an issue[.]). Here, given the City has claimed it filed its petition in good faith, objecting parties should not bear the burden of proof. Access to chapter 9 relief has been designed to be an intentionally difficult task given the constitutional concerns, In re Sullivan County, 165 B.R. at 82, and therefore the Codes requirements must be read in light of this concern. Appropriate allocation of the burden of proof furthers Congresss intent that any time a debtor seeks to enter into chapter 9 its efforts must be appropriately scrutinized. In re N.Y.C. Off-Track, 427 B.R. at 264-65.
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meaning of this phrase, the court in Sullivan County exhaustively reviewed case law under previous versions of the Bankruptcy Act to determine what constitutes good faith. Id. at 80-82. In sum, the court determined summarized the requirement as follows: In the Chapter 11 context, good faith has been described as a requirement which prevents abuse of the bankruptcy process by debtors whose overriding motive is to delay creditors without benefitting them in any way or to achieve reprehensible purposes. Determining whether a petition has been filed in good faith requires an evaluation of a debtors financial condition, motives, and the local financial realities. These comments would appear to be equally applicable, at least in part, to a Chapter 9 petition. Id. at 82 (quoting In re Villages at Castle Rock Metro Dist. No. 4, 145 B.R. 76, 81 (Bankr. D. Colo. 1990)) (citations omitted). At bottom, municipal debtors must explore alternative avenues of adjustment before its filing can be considered to be one made in good faith. N.Y.C. Off-Track Betting, 427 B.R. at 282. A mere wish is not sufficient to demonstrate good faith. There is no dispute that the City did not realistically explore any options before filing for chapter 9 protection. In fact, within several weeks of discovering its financial distress, in lieu of taking a step back and exploring whether alternatives existed, the City quickly moved to file its petition. Here, as in In re Sullivan County, the Citys decision to file bankruptcy was not the end result of considered debate, weighing the benefits and consequences of the petition. 165 B.R. at 82. A filing born of desperate financial circumstances does not evince good faith. As explained above, the fact that the City has not demonstrated, either pre or postpetition, any serious attempt at negotiating with its creditors or creating a Pendency Plan in an effort to adjust its debts in a manner that is both feasible and potentially confirmable under chapter 9 weigh against its claim that it filed this petition in good faith. Id. at 82 (The debtors immediate post-filing actions tend to confirm that the bankruptcy option was chosen with no real thought or sincere intention of debt adjustment in an overall plan sense.). Given the inherent advantage that municipal debtors have over (most) creditors in a chapter 9 proceeding, and the lack of the courts ability to control such a debtor once the gates to chapter 9 are opened, chapter 9 filings must be properly scrutinized before the court allows a municipal debtor into chapter 9. By its very design, access to chapter 9 is an intentionally difficult task. Id. Here, because the City made no efforts to negotiate with its creditors before filing for chapter 9 protection, and has failed to provide the Court -11-

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and the interested parties with the promised Pendency Plan, it cannot be said that the City filed its petition in good faith. The appearance of administrative insolvency further heightens the level of scrutiny that this Court should employ in evaluating eligibility. In the event that the City is administratively insolvent and cannot effect a plan of adjustment, dismissal may be warranted under 930. See In re New York City Off-Track Betting Corp., 2011 WL 309594, at *2-3 (Bankr. S.D.N.Y. Jan. 25, 2011) (dismissal under Section 930(a)(2) warranted where debtors creditors were not being paid undisputed amounts due during administration of case and where debtor ceased operations and concluded all efforts to seek confirmation of plan). Under chapter 11 of the Bankruptcy Code, one example of cause for dismissal is the continuing loss to or diminution of the estate and absence of a reasonable likelihood of rehabilitation. 11 U.S.C. 1112(b)(1). This circumstance exists where a debtor experiences negative cash flows and cannot evidence an ability to rehabilitate. See, e.g., Loop Corp. v. United States Trustee, 379 F.3d 511, 516 (8th Cir. 2004) (stating that a negative cash flow situation alone is sufficient to establish continuing loss to or diminution and citing In re Wright Air Lines, Inc., 51 B.R. 96, 100 (Bankr. N.D. Ohio 1985) for the proposition that rehabilitation means to put back in good condition; re-establish on a firm, sound basis). While there is no estate in a municipal bankruptcy, the concept embodied in Section 1112(b) should nevertheless apply by analogy under Section 930. The City should not be able to evade its creditors under the protection of the automatic stay while it deteriorates financially and fails to set forth a viable plan of adjustment. C. Request for Relief Under Section 941

CalPERS requests that the Court set a date by which the City must file a plan of adjustment, including financial and operating projections. CalPERS is not in a position to evaluate whether the City truly desires to effect a plan of adjustment (and is therefore eligible for relief under chapter 9) before either the material terms of the Citys plan are disclosed, or the plan itself is filed. The Bankruptcy Code requires that the City file a plan of adjustment either with its petition or at such other date as the Court fixes. See 11 U.S.C. 941. The Citys failure to file a plan in a timely fashion is cause for dismissal of this case. See 11 U.S.C. 930(a)(2) (3) (court may dismiss case under chapter 9 for cause, including unreasonable delay by the debtor that is prejudicial to -12-

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creditors or failure to propose a plan within the time fixed under section 941 of this title.). Because the Citys disclosure of the terms of its plan of adjustment bear on the question of whether the City desires to effect a plan of adjustment, the Court should require the City to file such plan sufficiently in advance of the evidentiary hearing on the Citys eligibility to allow parties in interest to meaningfully examine the Citys intentions regarding its plan of adjustment. This would include time to allow discovery with respect to the plan. D. Grounds. Because CalPERS only recently learned that the City was intentionally withholding payments due to CalPERS and other postpetition creditors, it simply has not had the opportunity to sufficiently analyze the facts related to the Citys failure to comply with its Pre-Pendency Plan and other issues related to eligibility such as whether the City has met established the insolvency requirement under Section 109(c)(3) or whether negotiations with all of the Citys creditors was impracticable under Section 109(c)(5)(C). Before the City is able to benefit from chapter 9, CalPERS must be assured that the Citys bankruptcy filing was a result of its insolvency, evaluated prospectively from the date of the petition. See In re Pierce Cnty. Hous. Auth., 414 B.R. 702, 710-11 (Bankr. W.D. Wash. 2009). In addition, CalPERS has also not had the opportunity to determine whether a true fiscal emergency existed so as to dispense with the pre-filing negotiations required by California Government Code section 53760. See 11 U.S.C. 109(c)(2) (requiring municipalities to be specifically authorized . . . by State law to seek chapter 9 protection.). Accordingly, CalPERS reserves the right to later object on other grounds after conducting proper discovery and obtaining a clear picture of the Citys finances and the events that lead to the Citys filing. IV. Conclusion CalPERS Reserves the Right to Object to the Citys Eligibility on Other

For the foregoing reasons, CalPERS respectfully requests that the Court (1) fix a date, pursuant to 941, for the City to file the necessary plan of adjustment, including financial and operating projections (2) allow CalPERS sufficient time to review and analyze the plan and conduct discovery with respect to eligibility, and (3) in order to allow sufficient time for the foregoing two

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items, continue the November 5 status conference on eligibility. CalPERS fully reserves its rights and remedies available under applicable law, including the right to seek relief related to the failure of the City to make required payments to CalPERS and relief related to the apparent administrative insolvency of the City.

Respectfully submitted, K&L GATES LLP Dated: October 24, 2012 By: /s/Michael B. Lubic Michael B. Lubic Michael J. Gearin Attorneys for California Public Employees Retirement System

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PROOF OF SERVICE OF DOCUMENT

I am over the age of 18 and not a party to this bankruptcy case or adversary proceeding. My business address is: 10100 Santa Monica Blvd., 7th Floor, Los Angeles, CA 90067 A true and correct copy of the foregoing document entitled (specify): PRELIMINARY OBJECTION OF CALPERS TO THE CITY OF SAN BERNARDINOS CHAPTER 9 PETITION AND REQUEST FOR RELIEF UNDER 11 U.S.C. 941 will be served or was served (a) on the judge in chambers in the form and manner required by LBR 5005-2(d); and (b) in the manner stated below: 1. TO BE SERVED BY THE COURT VIA NOTICE OF ELECTRONIC FILING (NEF): Pursuant to controlling General Orders and LBR, the foregoing document will be served by the court via NEF and hyperlink to the document. On (date) 10/24/12 , I checked the CM/ECF docket for this bankruptcy case or adversary proceeding and determined that the following persons are on the Electronic Mail Notice List to receive NEF transmission at the email addresses stated below:

Jerrold Abeles abeles.jerry@arentfox.com, labarreda.vivian@arentfox.com Franklin C Adams franklin.adams@bbklaw.com, arthur.johnston@bbklaw.com;lisa.spencer@bbklaw.com;bknotices@bbklaw.com Joseph M Adams jadams@lawjma.com Andrew K Alper aalper@frandzel.com, efiling@frandzel.com;ekidder@frandzel.com Thomas V Askounis taskounis@askounisdarcy.com Anthony Bisconti tbisconti@bmkattorneys.com Jeffrey E Bjork jbjork@sidley.com Sarah C Boone sboone@marshackhays.com, ecfmarshackhays@gmail.com J Scott Bovitz bovitz@bovitz-spitzer.com Jeffrey W Broker jbroker@brokerlaw.biz Deana M Brown dbrown@milbank.com Michael J Bujold Michael.J.Bujold@usdoj.gov Christopher H Conti chc@sdlaborlaw.com, sak@sdlaborlaw.com Christina M Craige ccraige@sidley.com Alex Darcy adarcy@askounisdarcy.com Susan S Davis sdavis@coxcastle.com Robert H Dewberry robert.dewberry@dewlaw.net Todd J Dressel dressel@chapman.com, lubecki@chapman.com Chrysta L Elliott elliottc@ballardspahr.com, manthiek@ballardspahr.com Scott Ewing contact@omnimgt.com, sewing@omnimgt.com Paul R. Glassman pglassman@sycr.com David M Goodrich dgoodrich@marshackhays.com Everett L Green everett.l.green@usdoj.gov Chad V Haes chaes@marshackhays.com, ecfmarshackhays@gmail.com James A Hayes jhayes@cwlawyers.com M Jonathan Hayes jhayes@hayesbklaw.com, roksana@hayesbklaw.com;carolyn@hayesbklaw.com;elizabeth@hayesbklaw.com D Edward Hays ehays@marshackhays.com, ecfmarshackhays@gmail.com Eric M Heller eric.m.heller@irscounsel.treas.gov Bonnie M Holcomb bonnie.holcomb@doj.ca.gov Whitman L Holt wholt@ktbslaw.com Michelle C Hribar mch@sdlaborlaw.com Steven J Katzman SKatzman@bmkattorneys.com Jane Kespradit jane.kespradit@limruger.com, amy.lee@limruger.com Mette H Kurth kurth.mette@arentfox.com Michael B Lubic michael.lubic@klgates.com

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Richard A Marshack rmarshack@marshackhays.com, lbergini@marshackhays.com;ecfmarshackhays@gmail.com Gregory A Martin gmartin@winston.com David J Mccarty dmccarty@sheppardmullin.com, pibsen@sheppardmullin.com Reed M Mercado rmercado@sheppardmullin.com Aron M Oliner roliner@duanemorris.com Scott H Olson solson@seyfarth.com Dean G Rallis drallis@sulmeyerlaw.com Christopher O Rivas crivas@reedsmith.com Kenneth N Russak krussak@frandzel.com, efiling@frandzel.com;dmoore@frandzel.com Gregory M Salvato gsalvato@salvatolawoffices.com, calendar@salvatolawoffices.com Mark C Schnitzer mschnitzer@rhlaw.com, mschnitzer@verizon.net Benjamin Seigel bseigel@buchalter.com, IFS_filing@buchalter.com Diane S Shaw diane.shaw@doj.ca.gov Jason D Strabo jstrabo@mwe.com, apolin@mwe.com Matthew J Troy matthew.troy@usdoj.gov United States Trustee (RS) ustpregion16.rs.ecf@usdoj.gov Anne A Uyeda auyeda@bmkattorneys.com Annie Verdries verdries@lbbslaw.com Brian D Wesley brian.wesley@doj.ca.gov Kirsten A Roe Worley kworley@wthf.com, bcordova@wthf.com

SEE NEF FOR CONFIRMATION OF ELECTRONIC TRANSMISSION TO THE U.S. TRUSTEE AND ANY TRUSTEE IN THIS CASE, AND TO ANY ATTORNEYS WHO RECEIVE SERVICE BY NEF 2. SERVED BY UNITED STATES MAIL: On (date) 10/24/12 , I served the following persons and/or entities at the last known addresses in this bankruptcy case or adversary proceeding by placing a true and correct copy thereof in a sealed envelope in the United States mail, first class, postage prepaid, and addressed as follows. Listing the judge here constitutes a declaration that mailing to the judge will be completed no later than 24 hours after the document is filed. Bryan C Altman The Altman Law Group 6300 Wilshire Blvd Ste 980 Los Angeles, CA 90048 Roger Jon Diamond 2115 Main Street Santa Monica, CA 90405

3. SERVED BY PERSONAL DELIVERY, OVERNIGHT MAIL, FACSIMILE TRANSMISSION OR EMAIL (state method for each person or entity served): Pursuant to F.R.Civ.P. 5 and/or controlling LBR, on (date) , I served the following persons and/or entities by personal delivery, overnight mail service, or 10/24/12 (for those who consented in writing to such service method), by facsimile transmission and/or email as follows. Listing the judge here constitutes a declaration that personal delivery on, or overnight mail to, the judge will be completed no later than 24 hours after the document is filed. The Hon. Maredith A. Jury United States Bankruptcy Court 3420 Twelfth Street Suite 325 / Courtroom 301 Riverside, CA 92501-3819 I declare under penalty of perjury under the laws of the United States that the foregoing is true and correct. 10/24/12 Date Carolyn Orphey Printed Name /s/Carolyn Orphey Signature