Rails 3 Mysql2 encoding problem

juan:~> ruby -v
ruby 1.9.2p0 (2010-08-18 revision 29036) [x86_64-darwin10.4.0]

juan:~> rails -v
Rails 3.0.0

juan:~> rails new testencoding
      create  
      create  README
......
      create  vendor/plugins
      create  vendor/plugins/.gitkeep
      
juan:~> cd testencoding/

juan:~/testencoding> cat gemfile
source 'http://rubygems.org'

gem 'rails', '3.0.0'

gem 'mysql2'

juan:~/testencoding> gem list mysql2

*** LOCAL GEMS ***

mysql2 (0.2.4)

juan:~/testencoding> rails c
Loading development environment (Rails 3.0.0)
~> Console extensions: wirble hirb ap rails2 rails3 pm interactive_editor

ruby-1.9.2-p0 > c = Mysql2::Client.new(:host => "localhost", :username => "root", :database => 'kedin', :encoding => 'latin1')
 => #<Mysql2::Client:0x000001019c8450> 

ruby-1.9.2-p0 > c.query("set names latin1")
 => nil 

ruby-1.9.2-p0 > c.query("select title from event where id = 84318").first['title'].encoding
 => #<Encoding:UTF-8> 

ruby-1.9.2-p0 > quit

juan:~/testencoding> irb
~> Console extensions: wirble hirb ap rails2 rails3 pm interactive_editor

ruby-1.9.2-p0 > require 'mysql2'
 => true 

ruby-1.9.2-p0 > c = Mysql2::Client.new(:host => "localhost", :username => "root", :database => 'kedin', :encoding => 'latin1')
 => #<Mysql2::Client:0x00000100920b48> 

ruby-1.9.2-p0 > c.query("set names latin1")
 => nil 

ruby-1.9.2-p0 > c.query("select title from event where id = 84318").first['title'].encoding
 => #<Encoding:ISO-8859-1>