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


* New San Bernardino leaders vow to cut pensions, seekCalpers concessions

* Old guard swept from power in recall elections

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

By Tim Reid

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

After council elections on Tuesday, the likelihood that SanBernardino will seek to renegotiate its pension obligations withthe 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 itscreditors set to begin later this month, the stakes are high forCalpers, America's largest public pension fund with assets of$277 billion. Calpers is San Bernardino's biggest creditor, andhas argued strenuously that pension payments cannot be touchedeven in a bankruptcy.

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

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

Calpers has objected to San Bernardino's bankruptcy at everyturn, fearing in part that if the city is allowed to lowerpayments to the fund, other cash-strapped cities will followsuit.

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

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

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

One of the new council members, Jim Mulvihill, a retiredprofessor who sits on the city planning commission, told Reutersthat San Bernardino paid too much in pensions to its publicemployee union members, especially police and fire.

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

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

One heavily pro-union councilman, Robert Jenkins, lost hisre-election bid two weeks after facing multiple criminalindictments related to sex ads he allegedly posted on Craigslistin an alleged plot to exact revenge on a former boyfriend.

His replacement, Benito Barrios, said the main message hereceived from voters was that the police and fire unions wieldedtoo much power and influenced too many members of the citycouncil.

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

"To the extent you now have a council which views pensionsand Calpers more negatively, the negotiations with Calpers willpresumably be more contentious and adversarial," said MichaelSweet, a San Francisco bankruptcy attorney not involved in thecase.

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

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