The California Public Employees' Retirement System (CalPERS) announced mid-October that the city of San Bernardino, Calif., stopped making required payments to the pension system since filing for bankruptcy in August, the Chicago Tribune reported. CalPERS is one of the biggest pension funds in the world, and the California cities of Stockton and Vallejo, which both recently filed for bankruptcy, have continued to make payments. If San Bernardino doesn't shape up, CalPERS threatened it would sever ties with the city.

There's nothing complicated about why San Bernardino hasn't paid the $5.3 million it owes, said Jim Morris, chief of staff for the mayor's office. “We're not paying them because we don't have the money,” he said. "We don't want to pick a fight with the 400-pound gorilla in the room."

With funds short, the mayor and City Council debated where money is best spent in the city and settled on paying employees and essential services first. Other obligations will be handled in bankruptcy court. The proposed cuts, which include removing $2.9 million from the fire department's budget, reduce the city's overall budget by about one-third.

"We don't have precedent here. But if we get precedent that CalPERS can be impaired in Chapter 9 that's going to make municipal bankruptcy a very attractive business tool for any city that needs to restructure its debt," San Francisco Lawyer Karol Denniston said.