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California pension fund to appeal San Bernardino bankruptcy eligibility

(Reuters) - The largest U.S. public employee pension fund said Thursday that it would appeal an August court ruling granting Chapter 9 bankruptcy protection to the city of San Bernardino, California.

The California Public Employees' Retirement System (Calpers) has fiercely opposed San Bernardino's bankruptcy since the Southern California city asked for protection from its creditors in 2012. The city, reeling from a housing bust, a decades-long decline in manufacturing, and soaring employee salary and pension costs, said it had run out of cash to meet its daily obligations.

The city suspended its $1.2 million bimonthly payments to Calpers at that time - an unprecedented move - though it resumed payments in July 2013. In August, a U.S. bankruptcy judge ruled San Bernardino eligible for Chapter 9 bankruptcy protection.

Calpers said in a press release Thursday that it would appeal "on the grounds that the city did not consider alternatives to filing for Chapter 9 protection, did not file its bankruptcy petition in good faith, and has not provided reliable financial information."

San Bernardino, beset by infighting among local officials, has struggled to keep its finances in order as officials including the city manager and the city finance director resigned in the wake of the bankruptcy filing.

The case is one of several municipal bankruptcies that are expected to set important precedents about whether municipal bondholders or pensioners get priority when a city goes broke.

The California city of Stockton, which is also in bankruptcy, has continued to make all payments to Calpers, and the pension fund has not opposed that city's eligibility for bankruptcy.

When San Bernardino was found eligible for bankruptcy in August, U.S. Bankruptcy Judge Meredith Jury said: "I don't think anyone in this courtroom seriously thought the city was anything but insolvent."

But Michael Gearing, an attorney representing Calpers, said her decision set a "dangerous precedent" that will encourage other cities to "create a crisis because they have a large number of creditors."

(Reporting by Jonathan Weber in San Francisco; Editing by Lisa Shumaker)

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