Vallejo one of few cities to use Chapter 9
Carolyn Jones, Chronicle Staff Writer
Sunday, May 11, 2008
By declaring bankruptcy, Vallejo has thrust itself into the national spotlight as a test case for thousands of floundering cities desperate to unload their extravagant public employee contracts.
"There's a wave of this coming across the U.S.," said Sajan George, an adviser to struggling public entities who worked on restructuring Orange County after it declared bankruptcy in 1994. "What happens in Vallejo could definitely set a precedent."
Battered by the plummeting housing market and skyrocketing public employee contracts, Vallejo made dubious history Tuesday night by becoming the largest California city to declare bankruptcy. The North Bay city of 117,000 was on track to start the fiscal year July 1 with a $16 million deficit and no money in reserve.
By declaring Chapter 9 bankruptcy, the city hopes to freeze its debts and gain time to renegotiate its police and fire contracts, which comprise about 74 percent of its $80 million general fund budget. It also hopes a judge will void part or all of the contracts, allowing the city and unions to start from scratch.
"It's clear the way we've been doing business has not served us well," said City Councilman Tom Bartee at Tuesday's meeting. "We have to change that."
Because so few public entities have declared bankruptcy, no one's sure how labor contracts will be affected. Vallejo's public safety unions have vowed to fight the proceedings, arguing that the city has plenty of money stashed in hidden accounts and is using bankruptcy to avoid paying police and fire fighters what they're owed.
The unions commissioned a report by Harvey Rose auditing firm in San Francisco that concluded the city has other ways to balance its budget besides slashing salaries, staffing and benefits, union leaders said. The report has not been made public because it's part of ongoing labor negotiations.
Meanwhile, the unions would like an independent state audit of Vallejo's books.
"We don't believe they're insolvent," said Vallejo police Detective Mat Mustard, vice president of the police union. "But by declaring bankruptcy, they've taken a financial crisis and turned it into a catastrophe. It's like using an elephant gun to shoot an ant."
It's very possible a judge will void Vallejo's labor contracts, George said. When airlines began filing bankruptcy several years ago, judges allowed them to renegotiate their union contracts, making bankruptcy an attractive option across the airline industry, he said.
Even so, bankruptcy is an extreme measure for a public entity, he said. Thousands of cities across the United States are in the same boat as Vallejo, but nearly all of them find other ways to avoid Chapter 9. They cut and outsource services, share services with neighboring cities, sell property and raise taxes and fees.
"Chapter 9 is still relatively unknown," he said. "It's not common now, but depending what happens in Vallejo it may become more common."
Vallejo intends to keep services at their current level throughout the bankruptcy proceedings, which are likely to take years, said city spokeswoman Joann West. But it's likely that the voters will be asked in November to pay higher taxes, several city council members said Tuesday.
Bankruptcy is not a cheap option. Legal fees may climb as high as $2 million, the city's credit rating will be damaged, developers and investors may avoid the city until its finances are resolved and property values may fall even further because of the public stigma, bankruptcy experts said.
The only other California city to declare bankruptcy is Desert Hot Springs, a city of about 20,000 near Palm Springs. Desert Hot Springs (Riverside County) filed Chapter 9 in 2001 after losing a lawsuit from a developer.
Bankruptcy allowed the city to continue providing services and pay its vendors, but at a steep price, said Mayor Yvonne Parks.
"I think there was a stigma," she said Thursday. "Developers and investors shied away from us. They came back eventually, but it was tough."
Still, the city was able to reorganize its finances, pay its debt and emerge from bankruptcy in 2004. This year the city earned an A credit rating, Parks said.
"Bankruptcy is not the worst thing in the world," she said. "I don't think anyone even thinks about bankruptcy when they visit Desert Hot Springs any more."