Thread: California city in bankruptcy may be model for others

California city in bankruptcy may be model for others
By Terence Chea
THE ASSOCIATED PRESS
Tucson, Arizona | Published: 05.26.2008
advertisementVALLEJO, Calif. — For years, this cash-strapped city on the edge of San Francisco Bay paid little heed to warnings it was offering its employees more than it could afford.
But Vallejo's day of financial reckoning arrived last week when it became California's largest city to declare bankruptcy.
Other cities are closely monitoring Vallejo's decision as they grapple with mushrooming employee costs and shrinking tax revenue amid the ongoing housing crisis and economic slump.
"They might not be at the crisis point we're in today, but sooner or later they're going to get there," said Vallejo Mayor Osby Davis.
This Bay Area suburb of about 120,000 people faces a $16 million deficit in its fiscal year starting July 1. Bankruptcy will keep services running and prevent creditors from suing the city while officials devise a plan to get back on solid financial footing.
Like Vallejo, many U.S. cities are saddled with labor contracts that offer salaries, overtime pay, pensions and health benefits they say they can't afford. Those expenses are expected to balloon as health care costs soar and employees retire earlier and live longer.
Vallejo officials hope a bankruptcy judge will allow the city to rewrite its labor contracts and bring compensation down. If they're successful, other cities may follow their lead, experts say.
"The solution that will come out of Vallejo may very well be a model for other cities facing similar fiscal challenges," said Marcia Fritz, vice president of the California Foundation for Fiscal Responsibility. "If Vallejo turns out better after declaring bankruptcy ... that will be an avenue (other cities) look at to break contracts."
But bankruptcy is not without pain. It will cost the city millions of dollars in legal fees and damage its credit rating. As a result, borrowing money to build roads, schools and other projects will become much harder — and more expensive.
"There is a stigma to bankruptcy in the capital markets," said James Spiotto, a municipal bankruptcy specialist at the Chicago law firm Chapman and Cutler LLP. "It's an admission of failure to deal with one's financial affairs."
Thirty-four U.S. cities, counties and towns have filed for Chapter 9 bankruptcy since 1980, but Vallejo is one of the largest to do so, Spiotto said.
Vallejo is also the first California city to declare bankruptcy because of budget problems.
The city filed its petition for Chapter 9 bankruptcy protection in federal court in Sacramento on Friday following months of failed negotiations with its police and firefighter unions.
The unions plan to challenge the bankruptcy filing by arguing that the city's finances aren't as bad as officials claim. They say there are other ways to fix its budget problems, such as their offer to accept $10.6 million in salary cuts next year, which the city rejected last week.
Many residents blame extravagant pay and benefits for police and firefighters for Vallejo's financial woes. Compensation for firefighters and police officers now make up 75 percent of its $87 million general fund budget, a much larger share than most California cities.
Like most of the state's public safety employees, Vallejo police officers and firefighters can retire starting at age 50 with full health benefits and an annual pension worth up to 90 percent of their highest salary.
The unions say their pay and benefits are in line with those of other Bay Area cities, and the city's police officers are being aggressively recruited by other municipalities.
Located about 30 miles northeast of San Francisco, Vallejo is best known for its Six Flags amusement park and Mare Island Naval Shipyard, which built hundreds of military ships until it was closed in 1996. The city also briefly served as the state capital in 1852 before lawmakers relocated to Sacramento.
In recent years, the traditionally blue-collar city has attracted more professionals to its Victorian homes near its historic downtown, as well new suburban developments that offered spacious homes at seemingly affordable prices.
But after years of rising real estate prices, Vallejo was hit hard by the subprime mortgage crisis and now has one of the nation's highest foreclosure rates. The city's revenue streams — mainly property taxes and development fees — started to dry up, and its already precarious financial position after years of budget deficits turned disastrous.
"Vallejo has been spending beyond its means for more than 15 years," said J.D. Miller, a financial planner and longtime Vallejo resident who served on the budget committee. "We've acted like someone who lives their life and spends their money as if their job will always be there."
Until this year, the city dealt with its budget shortfalls by cutting services, reducing city staff and striking deals with the unions to defer pay increases to later years. But officials say after years of slashing services and staff, there's nothing left to cut.
Signs of Vallejo's financial distress can be seen its potholed streets and aging municipal vehicles that the city doesn't have the money to repair or replace.
The city has cut funding to parks, libraries, senior centers, museums, the symphony and other civic organizations, leaving them to seek other sources of support. It even stopped paying its share of the annual Fourth of July Parade.
While Vallejo leaders struggle to reassure residents their city will remain livable, some see a silver lining in what appears to be a financial disaster.
"It's an opportunity to make our city how we want it to be," Mayor Davis said. "There's only one way to go now, and that's up."

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And just how much do you give illegals for welfare and food stamps....??? anyone wnat to take a guess????

Good grief, 90% pensions for city employees? I thought congressmen and tenured professors were the only ones with such lavish benefits. I received an email last week regarding the housing slump and its impact on city tax coffers. It was very long but very educational for anyone who owns a home. The essence is that tax assessors are not reducing the values of foreclosures because to do so will reduce city, county and government school revenue. If I find time, I'll repost it but in the mean time, this is a link to the short version headlined Tax Assessors Boggled By Housing Dip (click here). Seems Atlanta might be next. And it's a real opportunity for anyone who wants to buy a house worth $100,000 but sold AND TAXED at $10,000 or less.