SAN BERNARDINO—There will be a less-than-evenly-balanced distribution of pain, i.e., monetary loss, by the various entities being stiffed by the City of San Bernardino as the result of its now three-and-a-half year long tarrying in bankruptcy and its recently crafted exit therefrom. Of note is that the element historically representing the primary drain on the city’s pocketbook  – city employees – will bear far less of a burden at present and into the future than will practically all of the city’s creditors.
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.
What is referred to as the city’s “plan of adjustment,” will result in those who in years past had delivered goods and services to the city in good faith or had invested in the city by purchasing municipal bonds getting something far less than half of what they are owed with absolutely no allowance for interest.
On March 30, just two hours before the midnight deadline imposed on the city by U.S. Bankruptcy Judge Meredith Jury, the city put forth its ultimate plan of adjustment and attendant disclosure and noticing statements intended as the blueprint for the city’s alleviation of a major portion of its debt and other ongoing financial obligations. The plan of adjustment is intended to achieve a rough equivalency between the city’s income and expenditures so that it can make its exodus  from bankruptcy.
Of issue is that many of the holders of the city’s municipal bonds who had made those purchases on the assumption San Bernardino would make good on the terms of those securities calling for the paying back of double or more of what those investors had ventured will be gravely disappointed.
The document filed last week is a refinement of the first bankruptcy exit plan demanded by Jury last year and which was delivered on May 30, 2015. That plan called for the city deferring payments to a significant number of the city’s creditors for years or decades, such that they had no prospect for being made whole for an extensive period of time, if ever. Most pointedly, the city at that time proposed paying 1 percent of the $50 million owed to pension obligation bondholders, spelling out that investors holding those promissory certificates valued at $50 million receive an unsecured note and be paid under a reduced schedule predicated upon principal of $500,000, with the city not beginning payments on that principal until the sixth year after the plan of adjustment became effective.  The plan also called for significant reductions in retirees’ healthcare coverage, and the elimination of a number of city staff positions, including firefighters and trash collectors.
In the intervening time, the city has in large measure executed upon that plan, dissolving the municipal sanitation division and franchising trash hauling to Burrtec Systems and all but finalizing an arrangement to shutter the 137-year-old municipal fire department and have the county fire division take over firefighting and emergency medical response duties in San Bernardino, pursuant to the annexation of the entirety of the city into a county fire protection district, entailing the levying of a $148 per year parcel tax on all city landowners intended to underwrite the county’s provision of the service.
The city’s exit plan filed in May 2015 elicited howls of protest, not to mention litigation, from its creditors.
CalPERS, which is short for the California Public Employees Retirement System, is the city’s major institutional creditor. At present San Bernardino currently has an approximate $26 million annual obligation to the retirement system.  From July 2012 until July of 2013, the city withheld more than $14 million in pension fund payments and thereafter continued to underpay CalPERS the amount the system’s administrators maintain is continuously due it. The city offered to make partial payments into the system until such time as it got  back on its feet financially. CalPERS sternly rejected the city’s effort to forge a long-term solution that included renegotiating the amount of its commitment to the retirement system altogether.
CalPERS spent some $7 million on lawyers in its response to the bankruptcy filings made by San Bernardino and two other California cities, Vallejo and Stockton.
Pursuant to a mediation effort between the city of San Bernardino and CalPERS under the guidance of a court-appointed mediator, Judge Gregg Zive, some order of compromise was arrived at by which, according to a court filing, the city is to “make certain payments to CalPERS on deferred amounts owing.”  The precise amount the city is to pay has not been disclosed. CalPERS maintained the city was at least $16.5 million behind on its payments and that it owed interest on that arrearage. San Bernardino, while suggesting it would at some point make CalPERS whole, has not yet provided a schedule for doing so. Because of the confidentiality surrounding the tentative agreement and its precise terms, it is not publicly known whether the break CalPERS has assented to cutting San Bernardino on the money owed it is temporary or permanent, or whether it includes interest payments on the overdue payments or not.
Last week what became clear was that the city’s offer of one percent on the $50,000,000 debt owed to the holders of its pension obligation bonds had been a lowball offer intended to set the tone for the negotiations over what the city would pay to buy back those bonds. It turns out the city will pay 40 times that amount, and has now achieved an agreement to pay those certificate holders 40 cents on the dollar.
Jury, who ultimately held the leverage of being able to impose whatever terms she chose on all parties, was able to get everyone to come to an agreement. Whereas the unions representing the city’s police officers, firefighters and general employees, CalPERS and the pension obligation bondholders had all opposed the restructuring plan, they have now endorsed it.
But paradoxes yet attend the entire matter.
City staff, whose salaries and benefits represent the lion’s share of the expenses that left the city in such sad shape that the 2012 Chapter 9 bankruptcy protection filing was its only viable strategy, will fare comparatively well while the city engages in  legalistic and accounting ledger sleight-of-hand that will downscale the city’s over-burdensome debt.
The city has shed itself of the fire department, a major cost burden, as 67 percent of the cost of running the city was taken up by salaries and overtime paid to the city’s public safety employees – firemen, fire management, police officers and police management. Yet to achieve the cooperation of the fire department’s member in effectuating the county takeover of the city fire department, the city had to throw a major financial bone to fire management. Initially, the county offered to guarantee the hiring of the city’s firemen, but gave no such assurance to fire department management – the chief and seven battalion chiefs. When a way was cleared for the chief and battalion chiefs to be hired by the county, there was no guarantee that they would be extended job offers for management positions similar to what they now hold with the city. Nor were they given guarantees that they would be paid at the same rate as the city is paying them.
The San Bernardino Fire Management Association, the bargaining unit for the management echelon in the fire department, opposed an early version of the plan to annex the city into a county fire protection district, which was crucial for the takeover to take place. Once that takeover has been effectuated, the county has consented to hiring the battalion chiefs as fire captains, positions that would pay them anywhere from $33,000 to $54,000 less than they are now making as battalion chiefs. To get the battalion chiefs to go along, the city council has signed off on making up the difference between the $116,277 per year base salary the county pays its fire captains and the $150,000 to $172,000 per year the city’s seven battalion chiefs are now being paid and to continue to make up that difference for the first five years after the takeover is effectuated.  That element of the deal cuts contrary to the city’s stated goal of reducing/eliminating the cost of running a fire department, translating into another $280,000 in annual costs or $1.4 million over the life of that agreement.
At the same time, the city, which over the last seven years has reduced police department staffing from 356 to 248, is with the plan of adjustment committing to investing an average of just over $4.5 million per year in beefing up police presence in the city of 213,000, a total of $91 million over the next 20 years. City officials acknowledge they at present do not have nor do they anticipate having revenue to accomplish that. What is suggested is the need to increase police presence in the city is vital if it is going to overcome the stigma of being, behind Oakland, the second most violent crime-marred large city in California.
A sobering consideration is that the bankruptcy itself has cost the city in the neighborhood of $17 million for the services of attorney, auditors and financial consultants.
“The plan represents a major step forward for the city in its efforts to exit bankruptcy and breathe new life into the city’s economy,” the document filed with Jury puts forth. “All of the city’s principal creditor constituencies that initially opposed the city’s restructuring efforts now support the plan. That includes the City’s police, fire and other unions, the official retirees committee and CalPERS and the holder of the city’s bonds.”