'Ineffective' City Leadership Seen in San Bernardino's Chapter 9

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RIVERSIDE, Calif. — The San Bernardino, Calif. Chapter 9 case differs from other municipal bankruptcies because the city's leaders are unable to strike deals with creditors, Ambac Assurance Corp.'s attorney said during a hearing.

"They are all, smart, well-intentioned people, and I say that without qualification," said David Dubrow, a partner at Arent Fox LLP. "But as a group working with the City Council, they have a very ineffective approach to resolving issues. Because of this ineffective process, they seem to have an inability to form a consensus and reach agreements with others."

Durban spoke at a bankruptcy court hearing for the long-running case Thursday afternoon.

Dubrow contrasted the situation in San Bernardino with the way bankruptcy and insolvency negotiations were conducted in Central Falls, R.I.; Harrisburg, Pa.; Stockton, Calif. and Detroit.

He noted that with the exception of one creditor, who is appealing Stockton's bankruptcy confirmation, all of that city's creditors voted in favor of the Chapter 9 plan of adjustment.

"Usually one or two people can forge an agreement with creditors and then bring consensus," Dubrow said. "That has not been the process here — at least for us."

Over a three-year period, San Bernardino has only been able to reach a tentative agreement with the California Public Employees' Retirement System, he said.

Ambac joined with Erste Europaische Pfandbrief- und Kommunalkreditbank AG in a joint complaint filed Jan. 7 seeking equal treatment with the state's largest pension fund. The city has missed millions of dollars in bond payments since it declared bankruptcy in July 2012 on $50 million in pension bonds that EEPK holds and Ambac insures.

Dubrow added that it has been very difficult to get things done and that has made the difference in terms of forging the plan needed to exit bankruptcy.

U.S. Bankruptcy Judge Meredith Jury castigated the city in December for the sparseness of its term sheet, which she thought would be detailed enough to work as somewhat of a rough draft of a plan of adjustment. At that point, Jury ordered the city to draft a more complete plan of adjustment and set a firm deadline of May 30.

Dubrow was not alone in his assessment.

"In five months, we are nowhere," said Brian Goodrich, attorney for San Bernardino's firefighters. "They don't seem to be interested in planning a new agreement. We are going to have to litigate some of those issues."

The terms of the agreement the city struck with CalPERS in confidential mediation were released in a court filing the night before Thursday's hearing.

CalPERS got the cash-strapped city to agree on a plan to make past-due payments plus penalties. CalPERS officials say they accepted lower penalties than the maximum allowed by statute and under the agreement a large portion of the penalties will be credited to the city's CalPERS account.

San Bernardino agreeing to a $1.5 million payment on May 1, 2014 on $13.2 million in missed payments to CalPERS and monthly payments of $602,580 from July 1, 2014 through June 1, 2016 to repay missed payments and accrued interest for a total of $15.9 million, inclusive of the May 1, 2014 payment. The city began making the payments last year.

The city also agreed to make five annual payments of $400,000 to begin after the city reaches confirmation on its plan of adjustment, comprised of penalties and default interest.

CalPERS would not pursue its appeal of the city's eligibility to be in bankruptcy as part of the agreement.

If the city had rejected its CalPERS contract, it would have caused the pension fund to reduce its payments to retired employees by 50% — causing a mass exodus of city employees, said Paul Glassman, chair of Stradling Yocca Carlson & Rauth's bankruptcy and finance practice, who represents the city in the bankruptcy.

Glassman assured the judge despite creditors' comments to the contrary that the city is working diligently on its plan of adjustment and will make the May 30 deadline.

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Bankruptcy California
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