Thu May 7, 2015 5:09pm EDT

San Bernardino to slash retiree health care in bankruptcy plan

By Tim Reid - Reuters

LOS ANGELES The southern California city of San Bernardino has proposed virtually eliminating retiree health insurance costs under a bankruptcy exit plan it must produce by May 31, according to an attorney involved in negotiations with city officials.

Steven Katzman, who represents a committee of retirees in talks with the bankrupt city, says a tentative deal has been struck under which retirees would sacrifice the city subsidies they currently receive for health care coverage in exchange for a guarantee that San Bernardino continues to fund and not cut current pension benefits.

The deal would follow an approach taken in the recent bankruptcies of Detroit, Michigan and Stockton, California, where retiree health care was slashed or eliminated, while pensions emerged relatively unscathed.

San Bernardino recently said it intends to pay its biggest creditor - Calpers, the state's powerful public employee pension fund, with assets of $300 billion - in full.

Under the proposed San Bernardino deal, retirees would agree to permanently accept drastic cuts to health care coverage that have taken effect in recent months, Katzman said. Under those changes, retirees' were moved from an insurance pool that includes current, younger workers to an "unblended" pool of only retired workers, hiking their premiums significantly.

A monthly subsidy of $112 that the city provided retirees to help with premiums was also scrapped, though a small number of older employees who are ineligible for Medicare will still receive a small stipend, Katzman said.

Katzman has been negotiating behind closed doors with city officials along with a committee of eight retirees. The committee represents the city's roughly 2,000 living former workers.

Retirees affected by the health care cuts will, as creditors in the bankruptcy, get a chance to vote along with other creditors for or against the entire bankruptcy plan, though the court has final say.

"The goal has been to reach a deal with the city, and the retiree committee's recommendation is essentially forsake health care benefits for protection of retirees' pension benefits. The goal is to incorporate that agreement into a plan and we are in active discussions with the city towards that objective," Katzman said.

Even if retirees approve their part of the deal, final approval of a bankruptcy plan is likely to take months. Negotiations with city firefighters, who are suing San Bernardino over contract issues, have broken down. The police union still has not signed off on parts of the bankruptcy deal affecting its members. And bondholders have sued the city over its decision to pay Calpers in full.

Retirees who don't yet qualify for Medicare because of their age will now have to bear the total cost of their health care under the bankruptcy plan, which is still being worked on, Katzman said, though a small number of older employees who are ineligible for Medicare will still receive a stipend each month.

The judge overseeing the case has given the city a May 31 deadline to produce its exit blueprint.

Retirees, including former police, firefighters and other city workers, can choose to stay with the city health plan, while paying all costs, or they can quit the city health plan and look for coverage in a health exchange, or if eligible, apply for Medicare, the government-funded healthcare program for the elderly.

San Bernardino, a struggling city of 205,000 located 65 miles east of Los Angeles, declared bankruptcy in July 2012 with a $45 million deficit. Along with the recent bankruptcies of Detroit, Michigan, and Stockton, California, the bankruptcy is being closely watched by the $3.6 trillion U.S. municipal bond market.

San Bernardino's city attorney told Reuters in January that the city intends to cut its bondholder debt under the bankruptcy plan. The city has paid nothing to its bondholder creditors for nearly three years.

Those bondholders include EEPK, the Luxembourg-based bank and holder of roughly $50 million in pension obligation bonds issued by San Bernardino in 2005, and Ambac Assurance Corp, which insures a portion of those bonds.