Owing $281 million, bankrupt San Bernardino worried checks would bounce in 2012 – San Bernardino Sun

San Bernardino had thousands of creditors, large and small, when it filed for Chapter 9 bankruptcy protection on Aug. 1, 2012 – none larger than the California Public Employees’ Retirement System.

Unlike other bankrupt cities, San Bernardino halted employer payments to CalPERS the day before filing for bankruptcy. The insolvent city owed the pension giant $143.3 million, or nearly three-quarters of its $192.7 pension-related obligations, court documents revealed.

In all, San Bernardino listed roughly $281.2 million in total debts.

U.S. District Court Judge Meredith Jury, who oversaw the 2008 Vallejo bankruptcy, appointed a retired bankruptcy judgeto mediate negotiations between the city and its creditors under the premise that hashing out agreements in private would be better than doing so in public.

Early in the process, a team of city leaders, outside bankruptcy counsel, financial consultants and others met weekly amongst themselves – and with the mediator and creditors periodically – to chart San Bernardino’s path forward.

A key tool introduced by one consultant in particular allowed officials to project how each financial decision made during mediation would impact the city in the near and distant future.

Hard choices

Gary Saenz, San Bernardino city attorney (2013-20): That kind of tool makes me wonder how the hell they did that in the old days. It was a significant tool, like having a crystal ball almost in being able to project various positions and various negotiations with creditors and figure out how much we were willing to pay to resolve our bankruptcy issues.

In mediation, San Bernardino focused first on negotiating an agreement with CalPERS, which contended the city owed approximately $16.5 million, plus interest, for not paying its portion between Aug. 1, 2012, and July 2013.

Fred Shorett, San Bernardino councilman (2009-present): Our biggest obstacle and our biggest nemesis was CalPERS. We were not going to be able to get out of CalPERS, and that would’ve saved us.

Saenz: The first meeting that we had was with CalPERS, and that was the most intense because we had stopped paying them for about a year. The city had a huge pension liability, but the amount it was paying them was huge. When the city finally didn’t have any money in its coffers, it stopped paying CalPERS, and with that there was a significant penalty.

Allen Parker, San Bernardino city manager (2013-15): We seriously talked about pulling out of CalPERS and concluded we couldn’t beat them in court.

Michael Lubic, CalPERS attorney during negotiations: It was very important for the city (to negotiate with CalPERS) because in order to recruit personnel, and in particular public safety personnel, they needed to be able to offer CalPERS pensions. We weren’t really fighting. The city wanted to continue the relationship, the trick was doing all the various technical things, like reinstatement.

Parker: Everyone who makes decisions about CalPERS and what to do is in CalPERS, which makes it difficult to negotiate with them because you’re negotiating against your own retirement benefits.

Lubic: The city didn’t know how much cash it had, and the checks to CalPERS were big checks, so the city didn’t know if it had the cash to pay purely because they were not devoting enough resources to finance. They literally couldn’t figure it out, which made it very challenging to get accurate data.

They were not able to generate timely information, particularly about their cash situation.

San Bernardino mayor Patrick Morris leaves the United States Bankruptcy Court in Riverside on August 28, 2013. (File photo by Gabriel Luis Acosta, Fontana News Room/SCNG)

Pat Morris, San Bernardino mayor (2006-14): When you’ve got a ship that’s sinking, you’ve got a lot of people jumping overboard, and that’s true with a city that is dissolving into insolvency. We had a lot of people resign across the board, with the most pressure on the people in accounting and finance. We had a mega loss of employees, and those attempts to solicit or hire, it was a tough sell.

We basically had a very small staff having to do extraordinary work with regard to the monthly budget process.

It was not a pretty sight.

Lubic: The city didn’t not pay because they wanted to take on CalPERS. The city didn’t pay because they had no idea how much cash they had. They were concerned their check would bounce.

In June 2014, San Bernardino announced a confidential interim agreement with CalPERS that would repay the $14 million it owed and require the city to file its plan to exit bankruptcy by September 2015.

With CalPERS out of the way, other creditors, such as the police and fire unions, which had been growing impatient while working under city-imposed agreements that cut take-home pay by nearly 14%, sought resolutions.

San Bernardino acting Fire Chief Paul Drasil speaks to the media at the SBPD on Thursday, July 12, 2012, during a press conference by city police and fire chiefs on how public safety will be affected by the city's bankruptcy. (File photo by Kurt Miller, The Press-Enterprise/SCNG)
San Bernardino acting Fire Chief Paul Drasil speaks to the media at the SBPD on Thursday, July 12, 2012, during a press conference by city police and fire chiefs on how public safety will be affected by the city’s bankruptcy. (File photo by Kurt Miller, The Press-Enterprise/SCNG)

Steve Turner, San Bernardino Police Officers Association president (2011-17): Every week we saw guys that were jumping ship, and that would hurt the membership, would hurt the department, hurt the officers. Who hurts the most are the patrol officers driving around. When you go from 15-20 officers on a shift to 14 to 12 to 10 to eight, calls for service, that load doesn’t get lighter.

Seeing that as an officer-safety issue, we felt the pressure was on our side to get something done, to help stabilize so police officers would stop leaving.

It was a really volatile time. Morale was down, and we were having to fight it out with the city, which we felt was playing a lot of games, leading us on. We felt they weren’t being 100% truthful. We knew their agenda. It wasn’t like they were trying to hide it. Everyone knew their agenda was to get rid of Charter Section 186.

Saenz: The fire union fought us tooth and nail during almost the entire five years. They were very difficult, filing motion after motion, court hearing after court hearing. It was very, very difficult working with the fire union. Being a fireman was very lucrative in San Bernardino in the years leading up to bankruptcy, with significant raises and promotions, and of course, very good pension benefits.

Morris: I had half a dozen firemen during my years in office who were making over $200,000 a year. In some ways they gamed the system, and it was just stunning how abused the process was in terms of budget negotiations with those unions and their ability to basically control the dialogue.

Saenz: Police and fire are the most expensive services that every municipality provides to its citizens and the cost of our firefighters was extremely high in terms of pay, extensive OT, and pensions were out of whack with what they should have been, in my opinion.

What we decided eventually as a bankruptcy team was, ‘Let’s get rid of the Fire Department.’

On May 18, 2015, the City Council approved a Plan of Adjustment, or a roadmap for San Bernardino’s fiscal recovery.

Prepared by the city’s bankruptcy team, the plan included controversial moves such as outsourcing the Fire Department and waste disposal services, rewriting the 1905 City Charter and pink-slipping employees. Additionally, there were to be reductions to creditors – including a proposed penny-on-the-dollar payout to pension obligation bondholders – and organizational changes at City Hall to streamline governance.

San Bernardino City Mayor Patrick Morris listens as councilman Rikke Van Johnson speaks about the recent city bankruptcy issues during a council meeting on Monday, July 16, 2012. (File photo by Stan Lim, The Press-Enterprise/SCNG)
San Bernardino City Mayor Patrick Morris listens as councilman Rikke Van Johnson speaks about the recent city bankruptcy issues during a council meeting on Monday, July 16, 2012. (File photo by Stan Lim, The Press-Enterprise/SCNG)

Morris: The first big olive out of the jar was to get fire out. They were the big one. Politically, they were the most active, gave more money to political candidates as they had for generations. We had to get fire out of the equation.

San Bernardino and police union negotiators reached a five-year agreement in July 2015 that they said would lead to better policing and less crime, not to mention significant cost savings. The pact included annual cost-of-living increases in lieu of Charter Section 186.

Turner: We basically, without a fight, gave up 186 when all we’d done for four years was fight for 186. It was very scary for a lot of members because we fought very, very hard for 186. We would have people from the past say, ‘No matter what you do, the hill you die on is 186.’

It wasn’t the hill we died on, in my opinion. It was the hill we claimed victory on.

On Aug. 24, 2015, the City Council outsourced its 137-year-old Fire Department on a 4-3 vote. The agreement annexed the city into a San Bernardino County fire protection district and sent all property taxes to the county in perpetuity. Councilmen John Valdivia, Henry Nickel and Benito Barrios opposed the move.

“]Henry Nickel, San Bernardino councilman (2014-20): A 10-, 20-, 30-year agreement would’ve been reasonable, but to give up our property taxes permanently, I think created some real significant problems for the city, primarily because there’s no incentive to improve property values now. And, any windfalls go to the county. Clearly we had to do something, we couldn’t afford the ongoing pension liabilities and the costs to maintain our own Fire Department, I understood that. But I feel the deal we cut was a bad deal.

To this day, I get queasy thinking about it.

Virginia Marquez, San Bernardino councilwoman (2010-18): The Fire Department was very upset with us, but we couldn’t see any other way out.

Shorett: Outsourcing fire was the only way we were going to exit bankruptcy.

Nickel: The tenor on the council, people were so upset with the fire union and the department that they were willing to give away the farm and burn the barn.

A few months later, the city contracted with Burrtec for waste collection to overcome an estimated $20 million in deferred equipment maintenance and generate $24.9 million in franchise fees, all while returning service levels to adequate industry standards.

On March 21, 2016, the last large settlement with a creditor was reached when the City Council approved a pact with pension obligation bondholders that would pay them 40% of what they were owed.

That deal saved San Bernardino $45 million.

Parker: Bondholders are the ones taking the risk, and it didn’t pay off for them.

David Kennedy, San Bernardino city treasurer (1991-2019): We just screwed them.

Saenz: The pension obligation bonds were done in good faith. Bondholders loaned money to the city to help … so (cutting their final take) is not a pleasant thing or something you feel good about. But you look at what you’re ultimately trying to achieve, which is providing the citizens of San Bernardino the service they need and deserve, and that puts it in a perspective that is acceptable.

Twice before San Bernardino went bankrupt in 2012, voters shot down attempts to change the 1905 City Charter that many believe led to the city’s dysfunction and financial problems.

On his first day as mayor, however, R. Carey Davis presented a plan to form a citizen committee to study potential changes to the 48-page governing document. In the subsequent months and years, that nine-member committee crafted a new 14-page charter that overhauled how the city would operate.

Nickel: The original charter was clearly a poorly conceived, poorly constructed document that just presented all kinds of conflicting problems in terms of who had the ultimate management and authority in the city.

Davis: Under the old charter, you had an elected mayor, council, elected city attorney, elected city clerk … and what I thought existed was this fractured council and a fractured City Hall because of the loyalties to one side or the other.

Morris: Department leaders had long been under pressure from competing political forces. You had the city manager’s office, the mayor’s office and city attorney’s office all engaged in continuous political combat with regard to how to solve the problem, and that just did not help. Department heads saw that or perceived that as an attempt to interfere with decision-making by people who shouldn’t have been involved at all.

Saenz: Over the course of three to four bankruptcy meetings, we talked about the causes of the bankruptcy and came to the conclusion that one of the significant causes was the dysfunction at City Hall. People stepping on other people’s toes. People doing other people’s work. People going beyond their limitation, and that caused chaos.


Henry Nickel, 35, is sworn into the San Bernardino City Council by City Clerk Gigi Hanna in the City Clerk's office in San Bernardino on Wednesday, Feb. 12, 2014. Nickel will fill the 5th Ward seat vacated by Chas Kelley when he reigned before pleading guilty to felony perjury. (Photo by Rachel Luna, Fontana News Room/SCNG)
Henry Nickel, 35, is sworn into the San Bernardino City Council by City Clerk Gigi Hanna in the City Clerk’s office in San Bernardino on Wednesday, Feb. 12, 2014. (File photo by Rachel Luna, Fontana News Room/SCNG)

Nickel: You have to have clear lines of authority. If you have shared authorities, your organization is going to fail. That’s basic management.

Phil Savage, Charter Review Committee chair (2014-present): We very much wanted the charter to be simply a structural framework so the council had the ability to do what needs to be done and not be blocked by charter rules that weren’t necessary. The first thing taken up was should San Bernardino be a council-manager form of government or a strong mayor form of government or some kind of mixture, which is what we had before.

It was unanimously approved that modern cities structured themselves with a council-manager form of government.

In proposing a council-manager form of government, where the City Council sets policy while the city manager runs day-to-day operations at City Hall, the new charter revoked many of the authorities previously bestowed upon the mayor in hopes of establishing defined roles and responsibilities for elected and appointed figures.

The document also replaced Charter Section 186 with a provision that called for employee pay to be collectively bargained. Additionally, it transitioned the city attorney and city clerk posts from elected to appointed; removed any reference to the elected city treasurer; and required San Bernardino to have its own police department, language the City Council added late in the review process.

Savage: Because I’m a practicing attorney, I never thought it was appropriate to have the attorney for the city be essentially the best politician rather than the best attorney.

Kennedy: I always felt having an elected city treasurer was a dumb idea. You want to have somebody who has the skills and qualifications for the job, not Joe Schmoe off the street who can win elections and may not know anything about what he’s doing.

Morris: Strong mayor cities, cities who elect offices like city attorney, need to be refined to narrow the scope of politics.

On Aug. 4, 2016, the City Council placed the new charter on the ballot.

On Nov. 8, 2016, 60% of voters agreed to adopt it.

Savage: Our focus was not on the bankruptcy. It was strictly on how to have the best charter for our city, and it became an essential element of the plan to get out of bankruptcy.

Next in the series: San Bernardino exits bankruptcy court and focuses on the future.

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