In bankrupt San Bernardino, firefighting at crucial juncture

Bankrupt San Bernardino’s plan to cut costs by contracting for firefighter and other services has been aided by legislation and a court ruling. But a shortage of firefighters is causing a rough transition.

A second fire station was closed earlier this month and others were hit with temporary “brownout” closures, delaying response times. New hires for 14 firefighter vacancies are not expected to complete training until next month.

A unique city charter provision, which voters refused to reject last fall, links police and firefighter pay to the rates in 10 comparable cities.

“In my opinion, this is bordering on a crisis,” Allen Parker, the city manager, told the city council earlier this month. He authorized assistance from firefighters at neighboring departments for $3,000 a day if needed.

As the bankruptcy filed Aug. 1, 2012, nears a fourth year, the city’s struggle with the firefighters is the main arena. A key part of a city plan to exit bankruptcy expects to save $7 million or more a year by contracting for firefighter services.

U.S. Bankruptcy Judge Meredith Jury on July 15 rejected a firefighter union request to block contracting for services, ruling the city charter does not prohibit it. The union said it would appeal.

Gov. Brown signed legislation on July 14 allowing police and firefighters to transfer CalPERS pension credits to the San Bernardino County retirement system. The bill, AB 868, was prompted by the consolidation of two Big Bear fire departments.

The city council on July 6 voted 4-to-3 to give 115 firefighters raises of about 2 to 3 percent, costing $500,000. A unique city charter provision, which voters refused to reject last fall, links police and firefighter pay to the rates in 10 comparable cities.

The San Bernardino County Fire Department and a private firm, Centerra, are the two bidders to provide city fire services. City employees are expected to be rehired by contractors.

If the county department is awarded the contract, the new law would allow city firefighters, now in the state-run California Public Employees Retirement System, to keep their pension credits while transferring to the San Bernardino County retirement system.

The average annual compensation for the top 40 was $197,000, the middle $166,000, and the bottom third $130,000.

An analysis of the two bids by a consultant, Citygate, is expected to be completed next month for consideration by the city council, said Monica Lagos, a San Bernardino spokeswoman.

She said four firms submitted bids last week to provide waste management services for the city: Athens, Burrtec, CR&R, and Republic. The contract is expected to yield a “$5 million payment up front” into the troubled city general fund.

Firefighter staffing was cut by the loss of a federal grant and departures for jobs elsewhere. Unlike other unions, firefighters have not agreed to a 10 percent pay cut and to forego merit raises, instead filing several lawsuits against the city.

Parker said the firefighter raise, retroactive to Aug. 1, was delayed because firefighters would not meet to help select the 10 cities. The union said the delay was “an inappropriate political act” that violated the law, the San Bernardino Sun reported.

In June last year, a city consultant divided firefighter compensation into three groups, each with 40 firefighters. The average annual compensation for the top 40 was $197,000, the middle $166,000, and the bottom third $130,000.

The breach gave CalPERS grounds to terminate its contract with the city, once solidly middle class but in economic decline since the 1960s.

Despite the link to pay in 10 other cities, which this year included Irvine, Costa Mesa and Pasadena, a city recovery plan issued last May said police and firefighter compensation is 8 to 10 percent below market due to low benefits.

Contracting for fire services could reduce San Bernardino pension costs. Under current rate increases, the city’s actuary expects the annual CalPERS payment to grow from 11.9 percent of the general fund to 19.3 percent in fiscal 2019-20 before declining.

The actuary estimated that contracting for fire services would save the city $2 million a year in pension costs, Parker told the council in May. The $7 million or more in total expected savings is similar to a Santa Ana fire contract with Orange County.

After filing an emergency bankruptcy three years ago, saying it was in danger of not making payroll, San Bernardino took the unprecedented step of skipping its CalPERS payments for the fiscal year, $13.5 million.

The breach gave CalPERS grounds to terminate its contract with the city, once solidly middle class but in economic decline since the 1960s. By 2013 the San Bernardino median household income was $38,385, far below the California median, $61,094.

CalPERS responded by trying to sue in state court, backing an unsuccessful state attempt to withhold $15 million in city tax revenue in a dispute over unspent housing funds, and becoming the lone opponent of the city’s eligibility for bankruptcy.

“I don’t believe anyone in this courtroom seriously thought the city was not insolvent,” Judge Jury said as she ruled the city eligible for bankruptcy two years ago.

In a sketchy initial plan in 2012 for operating in bankruptcy, San Bernardino proposed a “fresh start” that would “reamortize CalPERS liability over 30 years,” perhaps in a way that would “realize value of $1.3 million per year starting fiscal year 2014.”

But under a mediated agreement to repay its $13.5 million skipped payment, the city paid CalPERS $1.5 million in May last year, followed for two years by monthly payments of $602,580.

The nearly $16 million total includes interest of 7.5 percent, the annual investment earnings rate assumed by CalPERS. When a plan to exit bankruptcy is confirmed or denied, the city will begin paying a $2 million penalty in five equal annual installments.

“Being a secured creditor in bankruptcy dramatically decreases the risk of nonpayment.”

As in the Stockton and Vallejo bankruptcies, the San Bernardino plan cuts retiree health care and bond debt but not CalPERS pensions. Most of the retiree health care subsidy was eliminated, avoiding an estimated long-term debt of $46 million.

The San Bernardino recovery plan also pays only 1 percent of the $48 million owed on pension obligation bonds issued in 2005. A bondholder argument that pension bonds should be treated the same as CalPERS payments was rejected by the judge.

“What I see as unfair, and might seem unfair to the outside world, doesn’t matter under the law,” Jury said last May as reported by Bloomberg.

Some think a bill signed by Brown this month, SB 222, could give bonds more protection in municipal bankruptcies. The bill places a “statutory lien” on revenue used to back general obligation bonds issued by local governments.

“This is the first time we have been able to say that GO bondholders are secured creditors in a municipal bankruptcy,” attorney John Palmer, who drafted the bill, told the Bond Buyer. “Being a secured creditor in bankruptcy dramatically decreases the risk of nonpayment.”

While still in mediation with San Bernardino, the CalPERS board in April 2013 approved sponsoring legislation to place a “present lien” on all assets of local governments contracting with the pension system. A bill has not been introduced.

“The Board and staff continually evaluate whether statutory change might be necessary,” Brad Pacheco, a CalPERS spokesman said via email. “Although the Board did approve this concept, we are still assessing the value of pursuing such a change.”
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Ed’s Note: Reporter Ed Mendel covered the Capitol in Sacramento for nearly three decades, most recently for the San Diego Union-Tribune. More stories are at Calpensions.com.