Ilargi: This sort of news article will become very familiar soon. What's good to note is that towns, unlike companies, don't close the gates and cease to exist when they declare bankruptcy. Probably creditors will be the biggest victims here, along with those working for the town. It will be allowed to continue as some sort of 'minimal facility', providing only urgent and 'necessary' services. Road maintenance won't be among them.
California City Moves Closer to Bankruptcy Filing
Vallejo, a city of 135,000 outside of San Francisco, moved closer to bankruptcy after negotiations with its labor unions collapsed. Bondholders will likely be asked to sacrifice some of their investment if the city seeks bankruptcy protection, an attorney for the municipality said last night. Vallejo faces ballooning labor costs and declining housing-related sales-tax revenue, leaving budget officials projecting that money will run out within weeks.
The city council is scheduled to consider a resolution tomorrow to file for Chapter 9 bankruptcy protection, after negotiations with labor unions to win salary concessions broke down Monday. If approved, Vallejo would become the biggest city and second-largest local government in the state after Orange County to file for bankruptcy.
Municipalities throughout California are grappling with billions of dollars in labor and pension cost increases incurred during the late 1990s. The crisis comes as the worst housing slump in the U.S. in 26 years saps tax revenue. The state's own $16 billion deficit led Governor Arnold Schwarzenegger last month to declare a fiscal emergency.
Bondholders are "creditors who would have to come to the table and it may be possible to adjust how much you are paying them and on what time period, which would, in effect, free up money that could be used as part of the plan to resolve the city's problems on a longer-term basis." John Knox, a public finance attorney with the law firm Orrick, Herrington & Sutcliffe, told the city council last night.
Vallejo faces a $6 million shortfall and won't have money left to pay salaries as of March 31, according to the city manager's office. The deficit is expected to grow to $13 million during the coming fiscal year, beginning July 1, according to budget documents.
Police and firefighting salaries, pension and overtime consumes $63.1 million, or about 74 percent of the city's $85 million general fund budget. The city has slashed $13 million in spending since December 2006, firing 47 workers.
"Bankruptcy is a last resort," said councilwoman Joanne Schivley. "But guess what folks, that's where we are now at."
Standard & Poor's on Feb. 21 changed its outlook to negative from stable on $59 million of city bonds. That debt, backed by water-system revenue, motor vehicle license fees and special district property assessments, is rated A and A-, the sixth- and seventh-highest investment grades.
Clark Stamper, who oversees $600 million of municipal bonds at Stamper Capital & Investments, including Vallejo debt, said a bankruptcy filing could encourage other California communities to consider the step should the city persuade a judge to reopen labor agreements. "What happens in Vallejo is going to be the model for what happens across the state," Stamper said yesterday. "It will have a big impact."
Chapter 9 of the federal bankruptcy code deals specifically with municipal governments such as cities, counties and school districts, allowing them to reorganize their debts and come up with a way to pay them off. If the city seeks bankruptcy protection, basic government services such as police and firefighting, would continue. The filing would freeze all creditor claims while city officials devise a plan to solve the financial troubles. That plan would need approval by the court, which could dissolve the labor contracts that aren't set to expire until 2010.
Vallejo was home to the West Coast's first naval shipyard, which was shuttered in 1996. The area has been one of the hardest hit in Northern California by the housing market slump.
Home prices in Solano County dropped 19 percent in January from the year before, according to DataQuick Information Systems, a firm that tracks real-estate in the state. Compounding the city's woes is lost tax revenue when above- normal rains damped attendance at a local Six Flags Inc. marine world amusement park, one of the 10 largest employers in the county.
Orange County in Southern California filed the biggest municipal bankruptcy in U.S. history in December 1994 after former Treasurer Robert Citron's wrong-way bet on interest-rate derivatives sold by Merrill Lynch & Co. lost $1.6 billion. The county of 3 million people is the third-most populous in California after Los Angeles and San Diego.
Desert Hot Springs, a town of 20,000 people north of Palm Springs, filed for bankruptcy in 2001, when it couldn't afford a legal judgment of almost $6 million. Both Orange County and Desert Hot Springs sold municipal bonds to pay creditors and emerge from bankruptcy.
Three years ago, the threat of bankruptcy loomed in San Diego as three mayoral candidates said a filing was one option for dealing with the city's soaring pension indebtedness to police and other employees. Jerry Sanders, who won the election, never pursued that step. Half Moon Bay, a small town south of San Francisco, has also considered bankruptcy because of a legal judgment handed down in November in a dispute with a real estate developer.
"Bankruptcy is a bad idea," Vallejo resident Andy Russo told the council during a standing-room-only informational hearing last night in city hall. "The stigma of bankruptcy will stick to us for a long, long time."