Elections in bankrupt U.S. city usher in pension reformers, Calpers battle

Fri Nov 8, 2013 2:26pm EST

* New San Bernardino leaders vow to cut pensions, seek Calpers concessions

* Old guard swept from power in recall elections

* New leaders set to enter talks with Calpers, other creditors, this month

By Tim Reid

SAN BERNARDINO, Calif., Nov 8 (Reuters) - Elections in bankrupt San Bernardino, California this week ejected a heavily pro-union old guard and ushered in new leaders who say they are determined to take on California's giant retirement system and the city's pension costs.

After council elections on Tuesday, the likelihood that San Bernardino will seek to renegotiate its pension obligations with the California Public Employees' Retirement System (Calpers)through the bankruptcy courts have greatly increased, analysts and new officials say in interviews with Reuters.

With mediated negotiations between the city and its creditors set to begin later this month, the stakes are high for Calpers, America's largest public pension fund with assets of $277 billion. Calpers is San Bernardino's biggest creditor, and has argued strenuously that pension payments cannot be touched even in a bankruptcy.

San Bernardino, a city of 212,000 that lies 65 miles east of Los Angeles, filed for bankruptcy last August and along with Detroit - the biggest U.S. city to seek Chapter 9 protection - is likely to set a precedent on whether retirees or Wall Street bondholders suffer the most when a city goes broke.

The California city of Stockton, by contrast, is set to settle its bankruptcy case without cutting payments to Calpers.

Calpers has objected to San Bernardino's bankruptcy at every turn, fearing in part that if the city is allowed to lower payments to the fund, other cash-strapped cities will follow suit.

After Tuesday's San Bernardino elections, the balance of power - and the implications for how the city will deal with Calpers - shifted dramatically, with a new-look council and the recall of the city attorney, James Penman.

Penman, a long-time local powerbroker with close ties to the unions, was ousted after 26 years in the post. While Penman had been circumspect about how the city intended to deal with Calpers, his successor, local real estate attorney Gary Saenz, was less so.

"Calpers has to accept the fact of San Bernardino's situation and look at compromise," Saenz told Reuters.

One of the new council members, Jim Mulvihill, a retired professor who sits on the city planning commission, told Reuters that San Bernardino paid too much in pensions to its public employee union members, especially police and fire.

The pension promises "are obligations we may not be able to make," he said. "We've know for a long time that pensions were going to be a problem. We are going to have to sit down with Calpers."

Scott Beard, a realtor who invested $150,000 of his own money to fund some of the candidates in Tuesday's elections, said: "At some point, a federal judge is going to have to tell Calpers to take 80 cents on the dollar."

One heavily pro-union councilman, Robert Jenkins, lost his re-election bid two weeks after facing multiple criminal indictments related to sex ads he allegedly posted on Craigslist in an alleged plot to exact revenge on a former boyfriend.

His replacement, Benito Barrios, said the main message he received from voters was that the police and fire unions wielded too much power and influenced too many members of the city council.

Most of the new leadership will be sworn in next week, before three days of closed-door negotiations with creditors beginning November 25.

"To the extent you now have a council which views pensions and Calpers more negatively, the negotiations with Calpers will presumably be more contentious and adversarial," said Michael Sweet, a San Francisco bankruptcy attorney not involved in the case.

A Calpers spokesperson, Rosanna Westmoreland, said: "We will continue to work with whoever the city leadership is to preserve the pension promises that they have made to their employees."

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