Wednesday, May 7, 2008

Vallejo, California City Officials Vote to File for Bankruptcy

Vallejo, California City Officials Vote to File for Bankruptcy

By Michael B. Marois

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Vallejo, California's city council voted to go into bankruptcy, saying the city doesn't have enough money to pay its bills after talks with labor unions failed to win salary concessions from fire fighters and police.

The city council's unanimous decision makes the San Francisco suburb the largest city in California ever to file for bankruptcy and the first local government in the state to seek protection from creditors because it ran out of money amid the worst housing slump in the U.S. in 26 years.

The city of 117,000 is facing ballooning labor costs and declining housing-related tax revenue that have left it near insolvency. The city expects a $16 million deficit for the coming fiscal year that starts July 1. Under bankruptcy protection, city services would keep running. It would freeze all creditor claims while officials devise a plan for emerging from bankruptcy.

‘‘Nobody wants bankruptcy but there doesn't appear to be a whole lot of options left,'' said city councilwoman Joanne Schivley. ‘‘We are going to be out of money by June 30. It's all a numbers game now.''

Once the city files its petition, a federal bankruptcy judge must decide whether the city is actually insolvent. If so, the case can proceed. If the judge rules the city isn't legally broke, the case would be dismissed, said the city's hired bankruptcy attorney Marc Levinson of Orrick, Herrington & Sutcliffe.

Police and firefighting salaries, pension and overtime consume almost 80 percent of the city's $89 million general fund budget. Cities in California on average spend about 60 percent of their budgets on firefighter and police salaries, according to the League of California Cities.

‘Sad Day'

City and labor union officials have been meeting since January to revise the existing contracts. The unions have balked at pay cuts. By filing for bankruptcy, the city is asking a judge to step in and force salary concessions from the labor unions.

‘‘It's a sad day when the officials we elected to lead this city just throw up their hands,'' resident Kenneth Shoemaker told the board prior to the vote.

Standard & Poor's on Feb. 21 placed $59 million of city bonds under review for a possible downgrade. That debt is rated A and A-, the sixth- and seventh-highest investment grades, respectively. Another $150 million in debt is backed by water- system revenue, motor-vehicle license fees and special district property assessments.

Vallejo is the first California city to seek bankruptcy since Desert Hot Springs, a town of 20,000 people north of Palm Springs, did in 2001. That municipality was hit by a legal judgment of almost $6 million it couldn't afford.

Different Expectations

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 lost $1.6 billion. The county of 3 million people is the third-most populous in California after Los Angeles and San Diego Counties.

‘‘It's a sad and difficult day in Vallejo,'' said Orange County Treasurer Chriss Street. ‘‘Now it's time to stop the blame game and time to start the management game. People need to start understanding that there's a pot of money and it can only go so far. The city is going to need learn to live with different expectations.''

Vallejo, on the San Francisco Bay, was home to the West Coast's first 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, where the town resides, dropped 19 percent in January from the year before, according to DataQuick Information Systems, a firm which tracks real-estate markets in the state.

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