SAN BERNARDINO–(May 19) This week, on May 18, the San Bernardino City Council in a 6-1 vote accepted the plan of adjustment set forth by city manager Allen Parker and city attorney Gary Saenz, twelve days before the deadline imposed by Judge Meredith Jury for the city to present its bankruptcy exit plan to her.
San Bernardino filed for Chapter Nine bankruptcy protection in August 2012 after years of dwindling revenues, expenditures drastically exceeding income, and deteriorating financial numbers that  resulted in $80 million in unfunded liabilities and a $49 million annual operating deficit. For nearly three years, Jury, who is overseeing the city’s bankruptcy filing in Riverside Federal Court, has exhibited patience with the city in its efforts to get back on its financial feet while deferring and delaying payments to dozens of its creditors, vendors and service providers.
In their effort to arrive at an operating budget by which city government will live within its means and pay as it goes for the services being provided to city residents, Parker, Saenz, the city’s finance division and outside consultants put forth a plan that will drastically alter the composition of municipal divisions or the manner in which city services are to be provided.
According to a report from Parker and Saenz to the council recommending the adoption of the plan of adjustment, also known as a recovery plan, “The city needs to streamline governance and operations and move into the mainstream of modern organization and service delivery for a city of our size. The city needs to undertake dozens of initiatives designed to reduce expenditures and generate revenues. For example we need to look at contracting solid waste, fire and other services. Other cities have saved money, while still delivering acceptable service levels, by adopting alternative service delivery approaches such as using regionalization and contracting to reduce costs, and the city needs to follow this lead. Unfortunately, even with improved operating results and new revenues the city will not be able to pay all of its obligations. Two large obligations which will be significantly impaired under the recovery plan would be the city’s pension obligation bonds and medical coverage for retirees. In both cases the city’s ability to satisfy these unsecured creditors is severely constrained. As the recovery plan makes clear, our first priority has to be the delivery of adequate municipal services. The pain will be shared among all stakeholders; employees, retirees, citizens (in the form of impaired service levels until the city can regain its footing) and capital market creditors. Only by undertaking the difficult process of refashioning the city into a modern municipal corporation can we be successful in creating a solvent future. The resolution authorizes the implementation of the actions proposed in the recovery plan – and the filing of the plan of adjustment and disclosure statement in compliance with the Bankruptcy Court-mandated filing deadline of May 30.”
The bankruptcy exit plan was approved by the council, with six of its seven members – Rikke Johnson, Virginia Marquez, Henry Nickle, Fred Shorrett, Benito Barrios and Jim Mulvihill – voting to accept it, and councilman John Valdivia dissenting. Under the plan, the city will pay 1 percent of the $50 million owed to pension obligation bondholders, significantly reduce retirees’ healthcare coverage, and undertake to eliminate a number of city staff positions, including, as mentioned in the Parker and Saenz report, firefighters and trash collectors.
Previously, city officials had considered and then balked at elements contained within the plan for recovery. But after nearly three years in the financial limbo of bankruptcy and Judge Jury’s patience drawing toward an end, the council majority accepted the plan of adjustment, even though it is  unpalatable and draconian in much of its aspect.
The council was given encouragement by San Bernardino County Supervisor Josie Gonzales, who embraced the plan, even as several members of the fire department registered objections to it.
Under the plan, a significant number of the city’s creditors will not be made whole for some time to come, if ever. It spells out that investors holding some $50 million in pension obligation bonds will receive an unsecured note and be paid under a reduced schedule predicated upon principal of $500,000. The city will not begin payments on that principal until the sixth year after the plan of adjustment becomes effective.
Nor will payments on bonds issued in 1996 and certificates of participation issued in 1999 be made for five years. Then, based on a newly established  maturity date of 2035, just interest will be paid for years six through ten, with the interest and principal to be repaid thereafter through the term of the lease.
In addition to outsourcing the city’s fire department and refuse handling functions, estimated to provide the city with savings of somewhere between $7 million to $10 million per year, the city will also make deep reductions in many of its operational costs, deferring $200 million in essential capital maintenance and fleet vehicle replacement.
Parker said the city has already been pared of 250 employees and that by its labor reduction strategies, the city will see savings of a total of $357.9 million from the current fiscal year 2014-15 through 2033-34. The plan intimated further drastic manpower reductions ahead, in that reductions effectuated so far entail a savings of $51.7 million. The city still suffers, according to Parker and Saenz, from a structural general fund deficit of $20 million. The plan also contains an already agreed-to reduction in health care for city retirees, who acceded to going into a more modest health plan in exchange for the city leaving relatively untouched the pension benefits those retirees are to receive.
Indeed, only two groups or “classes” of creditors have been left predominantly unscathed, i.e., “unimpaired” in the city’s recovery plan – city pensioners and those entities specified in the California Constitution as being entitled to payment out of the city’s restricted accounts. Saenz said protecting city employees, or at least those who will remain with the city, was another priority in the formulation of the plan. The city has also agreed to backfill by some $14 million the amount of contributions into the California Public Employees Retirement System it skipped out on in 2012-13 and to remain current on future obligations to that fund.
Eight other classes of creditors are identified under the plan and they all will be subjected to reduced, delayed or deferred payments from the city. The plan as accepted by the city council will be subject, however, to these impaired classes lodging objections or statements of protest to it, which must be considered by Jury before she accepts a finalized form of the plan. The city has indicated it will ask Jury to override any of those objections and force acceptance of the plan by all interested parties.