Do the following steps:

    Create a new username and password for postgresql on cloud9:

    $ sudo service postgresql start
    $ sudo sudo -u postgres psql
    postgres=# CREATE USER username SUPERUSER PASSWORD 'password';
    postgres=# \q

    Create ENV variables on cloud9:

    $ echo "export USERNAME=username" >> ~/.profile
    $ echo "export PASSWORD=password" >> ~/.profile
    $ source ~/.profile

    My database.yml for rails 4.2.0 on cloud9:

    default: &default
      adapter: postgresql
      encoding: unicode
      pool: 5
      username: <%= ENV['USERNAME'] %>
      password: <%= ENV['PASSWORD'] %>
      host:     <%= ENV['IP'] %>

    development:
      <<: *default
      database: sample_app_development

    test:
      <<: *default
      database: sample_app_test

    production:
      <<: *default
      database: sample_app_production

    Include the gem pg in Gemfile and install:

        gem 'pg', '~> 0.18.2'

    $ bundle install

    Update template1 postgresql for database.yml on cloud9:

    postgres=# UPDATE pg_database SET datistemplate = FALSE WHERE datname = 'template1';
    postgres=# DROP DATABASE template1;
    postgres=# CREATE DATABASE template1 WITH TEMPLATE = template0 ENCODING = 'UNICODE';
    postgres=# UPDATE pg_database SET datistemplate = TRUE WHERE datname = 'template1';
    postgres=# \c template1
    postgres=# VACUUM FREEZE;
    postgres=# \q

    From command line run:

    bundle exec rake db:create