A red, white and blue banner decorates the wall behind the stage at the Sunset Center, where Carmel’s mayoral and City Council candidates sit expectantly before a standing-room-only crowd at the town’s first candidate forum of 2010.

It’s new cats versus old dogs as five-term Mayor Sue McCloud, a 70-something retired CIA officer in a shimmering red shirt, prepares to face off on April 13 against Carmel newcomer Adam Moniz, 33, a self-employed energy consultant given to grandiose rhetorical flourishes.

In the council race, Jason Burnett, also 33, has returned to Carmel after two stints in the Bush EPA, where he was lauded by some for blowing the whistle on its failure to act on climate change, and scorned by others for believing he could convince the administration to act. He’s flanked on the dais by Gerard Rose, an attorney and 10-year council veteran, and local shop owner, Paula Hazdovac, who’s served since 1994.

Politics is personal and mean at times in this tiny, affluent burg where boos, hisses and an occasional catcall erupt at the event, despite refereeing by the county’s top lawman, District Attorney Dean Flippo.

A 50-something woman in front keeps up a running commentary. “That guy running for mayor is an idiot,” she says as the forum ends. “How old is he? 33? He’s just a few years out of college.” But Carmel is a small town and she won’t give her name. Ditto for the woman who led the hissing when incumbent City Councilman Rose said a sexual harassment and age discrimination lawsuit against the city was “silly.”

“We don’t have any issues; that’s the problem,” the first anonymous woman says.

That’s the way it might appear in this idyllic city of 4,000 – a village in the forest by the sea, as residents like to call it – where wild gardens adorn impeccable storybook bungalows.

It is a place where residents are so hell bent on preserving their piece of paradise that hours are devoted to such arcane questions as whether to allow metal roofs on village homes.

That makes Carmel an unlikely spot for a steamy city hall sex scandal, with on-leave Human Resources Manager Jane Miller accusing City Administrator Rich Guillen of workplace affairs, sexual harassment and mismanagement. Guillen has remained on the job in limbo – neither placed on leave pending investigation, nor cleared of the charges.

At the center of the drama is McCloud, who once said governing Carmel was a tougher gig than her role as a CIA agent during the Cold War.

Her detractors characterize her as a powerful puppet master, pulling strings behind the scenes as if she were still a covert operative.

Face to face, she is confident, matter-of-fact and in control – with a solid core of voter support. It is perhaps an indication of her electoral strength that deep-pocketed City Council hopeful Burnett, an heir to the Hewlett-Packard fortune, mulled a mayoral run, conducted perhaps the city’s first ever formal poll of voters, and ultimately opted for the council race. Burnett isn’t talking about the poll results, or the reasons he isn’t challenging McCloud.

But Moniz, who is taking her on, has attracted a fierce faction of his own, despite a somewhat tone-deaf campaign style in which his stentorian speech seems a bit grand for the safe, small-town platform of issues he presents.

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Whomever comes out ahead in the April election faces a costly legal firestorm.

A public vote last November to sell the Flanders Mansion has yet to end a decade-long, nearly million-dollar legal battle that has one set of local preservationists accusing those in Carmel City Hall of callous indifference to a treasured piece of typical local architecture, while suggesting that if placed on the market, the diamond in the rough could be converted to – gasp – affordable housing, since it must first be offered to a public agency before a private party can purchase it. What’s more, a high-stakes grudge match over a proposed luxury housing and retail development on Dolores and Seventh is headed for a second court battle.

Morale among city staff is low, by most accounts, although the mayor and City Council incumbents disagree with that characterization. “We’ll always have malcontents,” Rose responds. The city limps along, according to critics, in seat-of-the-pants fashion because of short staffing caused by cutbacks.

Carmel has also been undergoing demographic shifts with an aging population; second homeowners now outnumber permanent residents 60 to 40 percent.

But one of the toughest challenges may be the Miller lawsuit.

In the highly publicized case filed last year, Miller alleges Guillen rewarded two female workers who responded to his sexual advances with promotions and big raises while attempting to force Miller – who didn’t – out of her job. Guillen allegedly said he would eliminate her position, but before he could do it, Miller went on leave, claiming stress and depression.

Her 13-page letter to Mayor McCloud and the City Council alleges a range of inappropriate behavior: Guillen called Miller “hottie” and “girlfriend,” among other endearments. He sent off-hour text messages like this one that Miller says arrived early one Sunday: “this council… have [sic] no concept what it takes to run city hall.”

Miller says it was widely believed that he was having an affair with former community services director Christie Miller (no relation), who enjoyed meteoric salary increases in austere times. City payroll records confirm Miller earned less than $10 an hour when she was hired in 1998, with only volunteer work experience. By the time she left in 2007, she was Carmel’s fourth-highest-paid employee, at $103,000 a year.

Jane Miller alleges Guillen fired workers who displeased him, and appeared to enjoy total impunity.

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Stephanie Pearce, who recently retired from the city of Carmel after 34 years, says she’s seen the city’s dysfunction up close.

Pearce is tall with a grayish-blonde bob, clear blue eyes and striking features. She served as a library assistant for many years, and later as an administrative coordinator in Carmel City Hall. Her work records show she was a good employee.

In early January, Pearce personally delivered a carefully crafted one-paragraph missive to local newspapers that, when published, fell like a firebomb on Carmel City Hall.

Pearce wrote that McCloud has ignored the sexual harassment charges against Guillen, pursued pet projects and forced out key staff, leaving a skeleton crew that is inadequate to serve the city’s residents.

“Did she write that letter?” McCloud asks immediately after its publication, noting that Pearce’s name was misspelled in the Herald. “She sat right here,” McCloud says, gesturing at a desk three feet away, “and never gave an indication that anything was wrong.”

True, Pearce says. She was cordial with everyone, but retired six months earlier than planned because of the poisonous atmosphere.

Pearce had been reluctant to go public with her observations, emphasizing that she’s a private person who still works a couple of days a month at Carmel’s library and needs the income. Still, when she learned that McCloud, Hazdovac and Rose were seeking re-election, she felt compelled to speak up on behalf of friends who work for the city and others who she says were unfairly forced from their jobs.

And on a rainy Friday she’s agreed to come to the Weekly’s office, speaking on the record about her experience for the first time. “I guess I’m old-fashioned,” she says. “I care about people.”

Carmel City Hall used to be a great place to work, where employees respected and supported one another, Pearce says, but Miller’s letter perfectly describes the workplace she observed under Guillen’s administration. She says she remembers when Christie Miller spent hours in Guillen’s office talking and laughing, while other workers feared for their jobs amid a wave of downsizing.

The two city managers who preceded Guillen have given written declarations that they can’t recall a single employee harassment or discrimination lawsuit during either of their administrations, dating back to 1983.

Guillen has remained on the job despite the allegations.

“On what grounds would we put him on leave?” McCloud demands. “All we had was the [Jane Miller] letter. We didn’t have any evidence.”

But, local attorney Michelle Welsh, who practices employment law, says while she can’t comment on the Guillen case, courts have ruled that employers are liable for wrongdoing by managers and should err on the side of protecting their workers from potential harassment. And they’re obligated, she adds, to conduct unbiased investigations.

McCloud says Danville attorney Karen Kramer did investigate the Miller charges by interviewing a number of Carmel employees, and uncovered no wrongdoing. But she was hired by the city’s defense attorneys, which could call into question her impartiality. And Pearce says she clearly told Kramer about inappropriate behavior she saw at city hall, even though she feared retaliation.

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If McCloud is worried about the Miller case, she doesn’t show it.

At the Sunset Center forum, she ticks off a list of accomplishments, including a $10 million budget reserve, free trolley service, completion of the Sunset Center on time and on budget, and events like the Blue Ocean Film Festival and the Authors and Ideas Festival, which bring dollars to the city.

McCloud, who grew up in Carmel, began her career in public service in the 1950s, shortly after she graduated from Stanford. She was living in San Francisco when she got a call that seemed like a prank. It was the Central Intelligence Agency recruiting her for service, but it was no joke, McCloud says, adding that a professor likely recommended her. She went on to run CIA operations in Paris, London and Tokyo, among other places, during the Cold War.

Critics charge that McCloud governs behind closed doors, as if she were still a clandestine operative, while she insists on the transparency of her administration. She cites council meeting broadcasts online and on TV, her publicly listed home phone number, and the volume of constituent calls she takes at home. “Last Sunday I got 50, and that was by mid-morning,” she said in early January.

McCloud planned to retire this year, but says she changed her mind when local business people approached her and the council incumbents, arguing for experienced leadership in a shaky economy. She says she wants to wrap up the Flanders Mansion dispute, in which she has embarked on settlement talks with the opposing attorney.

A court-imposed water moratorium could further jeopardize the city’s finances, she says, by forcing restaurants to scale back and inns to close off rooms. “Stay tuned,” she warns the crowd at Sunset.

But the challengers contend that the checks and balances of opposing views are sorely needed in a city where the council has been accused of acting as McCloud’s rubber stamp.

By McCloud’s logic, Moniz argues, she’d govern for life, given the slew of unfinished business that regularly confronts the city’s government.

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At a get-to-know-the-candidate house party for Moniz, an anti-McCloud group of about 35 sips wine under a beamed ceiling as the sun sets over the sea on a gray February day. “I’m sure you’ll be much more open to volunteers,” one woman tells Moniz, arguing that the mayor has ignored the city’s citizen boards and commissions.

“I couldn’t agree with you more,” Moniz responds.

The evening falls into a call-and-response rhythm, with a resident’s anecdote followed by Moniz’s empathetic rejoinder and ringing promises.

“There’s a reason why no one wants to serve,” Moniz says of the city’s commissions.

He pledges to do away with what he calls McCloud’s unilateral decision making and says he’ll open up the selection process for city commissions by interviewing candidates in public.

Moniz also says he’ll limit himself to three terms, improve relations between city government and business, and offer incentives to so-called resident-oriented businesses. However, Moniz offers no specifics on what incentives he could offer, adding that perhaps he’d be able to help negotiate lower rents.

He enunciates carefully, punching certain words for emphasis as if he were engaged in formal debate. He wears high-waisted dress pants and a sport coat, drives a Lexus, and is often accompanied by his small terrier, Maddy.

Moniz, who was raised in Massachusetts, says he wanted to live in Carmel ever since attending the U.S. Open 10 years ago. He arrived last year via the high powered D.C. law firm and lobbying shop Patton Boggs, where he worked with a team of attorneys who represented a public utility in Washington state against Enron.

“We uncovered a lot of evidence of corruption and fraud, and I can say Adam was tireless when it came to that,” says Jennifer Tribulski, an attorney and former Patton Boggs co-worker. “He just has this experience of uncovering things and not stopping until he finds what he’s looking for.”

Moniz studied law, earning two degrees at Georgetown and Syracuse, although he says his real interest is public policy. He never made a serious attempt at the bar exam, he says, and is now a consultant to a trade group that represents utility companies like PG&E.

Lately, he has barraged the city of Carmel with requests for information to better understand its operations. He’s knocked on doors, appeared at multiple house parties, and even snagged a $100 contribution from former Florida Governor Jeb Bush. When Bush was governor, Moniz worked in his D.C. liaison office.

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City Council challenger Burnett is taking his campaign to the streets with equal fervor.

Incumbents Rose and Hazdovac, who have crushed all comers for years, are quick to admit they face a tough opponent with an arguably better campaign than Carmel has seen in some time.

Rose defends his record of working to trim emergency response times in Carmel, making it the safest place in the county to have a heart attack. He says his first priority is public safety and determining whether Carmel should run its own fire department or join with other cities to do so. He promises to continue efforts to attract business to Carmel’s empty storefronts.

Hazdovac argues the city runs more efficiently than it did when it was more fully staffed years ago. She also prioritizes public safety and is concerned about deferred infrastructure maintenance.

Rose and Hazdovac are theoretically opponents, but they are at a loss to name an issue that divides them. Maybe parking meters, Hazdovac says.

On a February morning, Burnett chats easily with the L.L. Bean-clad retirees picking up mail at the Carmel Post Office.

In this town, mail carriers don’t deliver because the homes have no addresses, only cross-streets – and names, like Heather House or The Perch. A residents’ handbook describes a pair of side-by-side houses, one named, “This is it,” and the other, “This isn’t.”

Susan Harris Baxter caps off a couple of hours of campaigning by giving the candidate a big hug. “I’ve known Jason since he was a baby,” she says “He’s a wants-to-save-the-world kind of kid.”

A registered Democrat and generous donor to party candidates, Burnett points to his service as a top official in the Bush EPA as proof that he can work across ideological lines. He is the grandson of Hewlett-Packard co-founder David Packard, grew up in Carmel Valley and has returned to start his own Marina-based company, Burnett Eco Energy, which aims to profit by helping local businesses conserve energy and reduce costs.

A disciplined campaigner who doesn’t stray far from a series of largely non-controversial talking points, Burnett argues for a mix of businesses serving both tourists and residents. He vows to increase openness in city government and boost employee morale, which he says will head off costly litigation.

He contends Carmel’s financial position is shakier than the incumbents admit because of millions of dollars the city will have to shell out to repair its city’s infrastructure, including its fraying seawall, which he argues could be shored up with preventive maintenance. And the city, he says, has failed to account for the sharply rising cost of employee retirement benefits it’s obligated to pay.

But in a time when the town’s population and tourism income are declining, Burnett – and his supporters – stand out for thinking bigger about the city’s future than other candidates.

One of them is restaurateur Gabe Georis, who last year opened Mundaka, a tapas bar and a rare Carmel gathering spot popular among 20 – and 30-somethings. He notes the town has lost the bohemian edge that historically drew both visitors and residents.

A big guy with a loud voice, Georis sits at a table near a kitschy Spanish bullfighting poster in which he appears as matador, and greets the staff as they trickle in on a Saturday afternoon. Burnett propaganda rests near the toothpicks on a ledge by the door.

Like Burnett, Georis left town after high school, and came home to Carmel as an adult.

“We’re back and saying this isn’t really the town we want to be living in,” Georis says. “The sense of community isn’t there anymore.”

Georis is in the hospitality business, so he’s not arguing against tourism, but he contends that a vibrant community with places locals like is a bigger draw than galleries and eateries tricked out for visitors.

The discussion is one that appeals to Burnett.

On a first date with his wife, Melissa, an architect and art historian, Burnett says the two sat at a D.C. eatery and bonded like a couple of wonks over the work of Jane Jacobs, who wrote the urban planning classic The Life and Death of Great American Cities.

Jacobs, Burnett says, would have liked Carmel’s quirky points of interest – a tree in the middle of a sidewalk or sculptural park benches where people can meet and chat.

She might have been less sanguine about its dwindling population, its abundance of frou-frou shops and its dearth of basic services, like hardware stores.

But U.S. Rep. Sam Farr (D-Carmel), who supports Burnett, says Carmel can stay viable with innovative policy choices, like becoming a model of energy efficiency and encouraging affordable housing.

For his part, Burnett has floated ideas like green tourism and improved beach access for people with disabilities.

“The problem Carmel has is, they’ve fought change so long that they don’t know how to think creatively,” Farr says. “You can’t just say no to everything.”

Georis hopes Burnett will get a chance to try new things.

“My peers are saying, you guys had your turn,” he says, “and it’s time for us to take our turn.”