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Bondholders Would Take a Big Hit Under This City's Bankruptcy Recovery Plan

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Connecting state and local government leaders

The financially beleaguered municipality may also look to contract out fire protection, waste management, and other servies

To emerge from Chapter 9 bankruptcy protection, the city of San Bernardino, California may look to outsource fire department services, while also cutting retiree healthcare benefits, and paying pension obligation bond holders about one-cent on the dollar.

Those are among the measures outlined in a bankruptcy recovery plan the city publicly released on Thursday. San Bernardino has until May 30 to file a “plan of adjustment” in U.S. Bankruptcy Court—basically a roadmap that shows how the municipality intends to regain its financial footing. The recovery plan is meant to provide the foundation for that court filing.

To cut costs, the plan says the city should look to contract out a broad range of services, including fire protection, waste management, graffiti removal and vehicle maintenance.

The plan notes that San Bernardino has already reached a tentative agreement to discontinue monthly healthcare subsidy payments of $112 to retired municipal employees.

Under the proposal, the city would also pay back the holders of $48.4 million in outstanding pension obligation bonds about 1 percent of what they are owed, the equivalent of $484,000.

Earlier this week, a bankruptcy judge ruled against bond creditors who challenged an earlier pledge the city had made to fully pay pension obligations to the California Public Employees' Retirement System.

City officials, consultants and lawyers worked to develop the recovery plan in recent months. In addition to cost saving measures, it highlights the need for extending a 0.25-cent sales tax, which would require voter approval, and calls for parts of the city charter to be simplified.

“Decades of questionable management and inefficiency are very much the result of a convoluted City Charter that complicates daily management and generally neutralizes executive authority,” the recovery plan states. “The City’s governance structure is highly complex and unique compared with any other city in California.”

San Bernardino’s City Council is scheduled to discuss on Monday whether to proceed with the plan.

With a population of around 213,000 San Bernardino is located about 60 miles east of Los Angeles. The city sought bankruptcy protection in August 2012. With its general fund depleted at that time, the city was unable to keep up with normal operating expenditures.

Since then, the city’s firefighters union, San Bernardino Professional Firefighters Local 891,  has resisted making concessions. A U.S. District Court judge last week sided with the city when he affirmed several bankruptcy court decisions that the union had appealed.

The judge, Otis D. Wright II, referred to the union’s appeals as “meritless” in one of his opinions.

The president of the firefighters union did not return a message on Friday seeking a response to the outsourcing proposal. San Bernardino’s city attorney was unavailable to comment.

For fiscal 2014-2015, the fire department is slated to cost the city $31.5 million, which is about 24 percent of the city’s general fund, according to information in the recovery plan.

The city has already issued a request for proposals for fire protection services and is expecting responses by next Wednesday. Among the agencies that were invited to respond to the request were the San Bernardino County fire department, the state’s Cal Fire, departments in nearby cities and private service providers. An estimate in the recovery plan says that contracting out fire services could save San Bernardino $9 million or more annually.

Bill Lucia is a Reporter for Government Executive's Route Fifty.

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