“It has been a long time coming, but as the judge said, that time was necessary,” said San Bernardino City Attorney Gary Saenz.

RIVERSIDE, Calif. — After more than four years, San Bernardino has a clear path to exit its Chapter 9 bankruptcy.

U.S. Bankruptcy Judge Meredith Jury issued a tentative oral ruling Tuesday confirming the city's bankruptcy exit plan.

In a somewhat rambling ruling, Jury highlighted the obstacles faced by the city since it declared Chapter 9 bankruptcy in August 2012.

"We got here at the speed this case was supposed to go," Jury said of the four-and-one-half year process. "The city came in financial chaos and it is leaving in much better shape."

Over the course of the case, nearly the entire City Council has turned over, a new mayor and city attorney were elected, and the city lost its city manager three times. The city has relied on consultants to fill the gaps.

"It is a very important day for the city," said City Attorney Gary Saenz.

"It has been a long time coming, but as the judge said, that time was necessary," he said.

"The agreement has caused everyone to share the pain," Jury said. "No one is walking away without taking some kind of hit – with the exception of CalPERS."

Jury said it was really the employees who get the benefit of the settlement with the California Public Employees' Retirement System, in which the city paid everything and made the pension fund whole for payments missed early in the bankruptcy. But the employees also took a hit, because their benefits have been reduced. The retirees also agreed to reductions in healthcare benefits in order to maintain their CalPERS benefits at current levels, she said.

San Bernardino impaired CalPERS by missing $13 million in payments when it declared bankruptcy in August 2012, but the city agreed in negotiations to make payments to make the pension fund whole.

"I was trying to show that it was the employees who feel the pain, because CalPERS is just a conduit," Jury said.

The attorney for CalPERS, Michael Lubic, disagreed with Jury's assertion.

"CalPERS manages the plan. CalPERS in its individual capacity, not as fund manager, does have economic interests that were implicated in this case and could be implicated in other cases," Lubic said.

Jury responded: "That is your interpretation of the law, but I have not made a binding statement, so I will withdraw those comments."

The majority of the hearing was taken up with arguments from attorneys for two "civil rights creditors" with injury claims against the police department. The city reached an agreement in mediation with the Big Independent Cities Excess Pool, a risk-sharing pool of large Southern California cities for claims against any of the member cities, confirming that BICEP is on the hook for claims over $1 million.

Duane Folk, an attorney for a civil rights creditor wanted the judge to create a special class of creditors for such clients, so they would not be limited to the 1% other unsecured creditors receive. The claimants would receive 1% for up to $1 million of their claim from the city and 100% for anything over $1 million from BICEP.

Attorneys representing the bank and insurer for $51 million in pension obligation bonds both asked that the record remain open for submitting supplemental declarations around the agreement they have with the city.

Jury said she would not agree to leave the record open, because that could go on forever, but allowed them to submit supplemental declarations as long they would not be introducing anything contrary to the current agreements.

Vincent J. Marriott III, a partner with Ballard Spahr, who represents Commerzbank Finance & Covered Bond S.A., the pension bondholder, congratulated the city for working through what he called not only financial, but political challenges.

"I think the result today is really a tribute to all the work and effort that went into this on the city's side," Marriott said.

CalPERS reached an agreement in substance with the city more than a year ago and the city reached an agreement with pension bondholders in May. U.S. Bank, which holds several million dollars of commercial paper issued against city buildings, also had previously reached an agreement with the city.

The pension obligation bond agreement continues a trend of bonds faring worse than pensions in Chapter 9 cases.

The city agreed to pay bondholders 40% of what they are owed, rather than the more severe 1% it originally proposed, because the agreement allowed it to stretch out payments 20 years.

The city worked hard to reach those agreements, but always kept in mind its ability to maintain service levels for residents, Saenz said.

The city outsourced fire services to the county to save money and provide adequate service. Its plan includes hiring back police officers over the next five years until it reaches 300. The City Council approved hiring nine new officers and a rehire on Monday, he said.

The more formal written ruling is expected January 3 to give the parties time to wrangle over language.

Creditors have until Jan. 20 to lodge objections. A hearing to review the judge's written ruling is scheduled for January 27.

 

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