San Bernardino Seal

By Ed Mendel
November 20, 2014

A former Stockton city manager, Bob Deis, regarded as the architect of the Stockton plan to exit bankruptcy, is part of a consulting team hired by bankrupt San Bernardino this week to develop an exit plan.

A court filing Monday officially revealed, after a mediator lifted a gag order, that under a deal announced in June San Bernardino has begun repaying skipped CalPERS payments ($13.5 million plus fees and interest) and will not cut pensions in bankruptcy.

Stockton did not want to cut pensions, saying they are needed to be competitive in the job market. But a federal judge ruled in the Stockton case that CalPERS pensions can be cut in bankruptcy, where federal law prevails over state attempts to protect pensions.

While preserving pensions, the Stockton plan cut bond debt and eliminated retiree health care, replacing a $545 million long-term debt with a $5 million lump sum. A holdout, Franklin bonds, appealed the approval of the Stockton exit plan last month.

Vallejo exited bankruptcy three years ago with a similar plan that cut bond debt and retiree health care. City council members said later they did not try to cut pensions because CalPERS threatened a long and costly legal battle.

Retiree health care debt was often ignored until a change in accounting rules a decade ago. A state Supreme Court decision in 2011 said retiree health care can be an “implied contract” with vested rights, protected much like a pensions.

Many employers do not make pension-like investments each year to help pay for retiree health care promised in the future. Last year the state worker retiree health care unfunded liability, $64.6 billion, was larger than the state worker CalPERS unfunded liability, $49.9 billion.

A status report filed by San Bernardino earlier this month said closed-door talks with a committee representing “several thousand retired city employees” would be a “huge step forward” if an agreement can be reached.

“Just recently, the city and the retiree committee reached a tentative agreement regarding modifications to retiree health benefits, contingent upon the parties reaching an overall agreement on plan treatment of retiree claims,” said the city filing.

In Stockton, part of the retiree committee agreement to accept the elimination of retiree health care was a promise from the city that retiree pensions would not be cut in the bankruptcy.

The San Bernardino city council voted 6-to-1 Monday to award a $300,000 contract to Management Partners, which under the direction of Deis worked on the Stockton “plan of adjustment” to cut debt and exit bankruptcy.

Deis retired as the Stockton city manager last November and joined Management Partners in May. The consulting firm worked with San Bernardino from 2007 to 2011, making a large number of recommendations, only a third of which were enacted.

Stockton had a structured bankruptcy that began with a 90-day mediation with creditors under a new state law. The attempt to avoid bankruptcy failed, and the city filed on June 28, 2012.

San Bernardino made an emergency bankruptcy filing Aug. 1, 2012, seeking immediate debt protection to continue making payroll. The long-troubled city has had political in-fighting, changing demographics and a sagging local economy.

A George Mason University study last year said San Bernardino’s per capita income, $15,762, was about half of the state average, $29,634, and the city had “committed to salaries and pensions that were neither proportionate nor sustainable.”

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