May 8, 2008

Vallejo, CA Bankruptcy Looms

This is a really big story that is not getting much press coverage. Astute LAAG readers have seen this coming for some time. The question is really whether or not this will spell out the future for many small California cities that are being held in a chokehold by public employee unions who refuse to bend during the downturn in the economy. Their feeling is just raise taxes. The hell with the taxpayers. We want our six figure retirements! We are the new elite in CA. This will be a big showdown and Vallejo needs to be watched to see if it is the model for future bankrupt cities. I am sure Long Beach is watching closely. I hope the public unions are.

Vallejo, California, Residents Foresee Cuts as Bankruptcy Looms

By Michael B. Marois and William Selway
More Photos/Details

May 8 (Bloomberg) -- As Vallejo, California's home prices plunged, the once-humming Navy town on the north edge of the San Francisco Bay seemed like a good place to settle down, said Tim Medrow, a manager at a store that sells floor and bathroom tiles.

Then came the city council meeting Tuesday night, when elected leaders voted to turn Vallejo into the largest California city to declare bankruptcy. ``It's crippling the city,'' said Medrow, 32. ``It's already feast or famine. And it's only going to get worse now.''

Vallejo, with a population of 117,000, is being squeezed by declining home sales that have rippled through its economy, cutting into the taxes it relies on from local retailers and home owners. It has been pushed to the breaking point, city officials say, by union contracts with firefighters and police it can't afford or renegotiate.

After talks with unions stalled, the seven members of Vallejo's city council decided unanimously to approve filing for bankruptcy. According to a report by City Manager Joseph Tanner, the city would otherwise face ``draconian'' cuts to close a $16 million budget shortfall that would leave the community faced with deteriorating roads and public buildings and rising crime.

``This is dire,'' said Councilwoman Erin Hannigan. ``We are at rock bottom.''

Bankruptcies Rare

Cities and towns rarely go bankrupt. Since 1937 there have been 543 municipal bankruptcies, two-thirds of them small districts established to sell municipal bonds for projects, according to James Spiotto, a municipal bankruptcy specialist at Chapman and Cutler LLP in Chicago.

The last California city to go bankrupt, Desert Hot Springs, a town of 20,000 near Palm Springs, did so in 2001 because it was hit by a legal verdict it couldn't afford to pay. Orange County, California, was felled by bad bets with leveraged investments in 1994.

Vallejo residents worry that a filing will hurt a city that struggled even in the best of times, when median home prices more than doubled between 2000 and 2005, according to the city manager's report. In interviews, they said they were concerned it could scare away new residents, hurt city services, and push Vallejo deeper into the hole.

``What business is going to want to come to a city with no money?'' said Josef Klaus, the owner of a vacuum and janitorial supply shop.

Vallejo, on the San Francisco Bay, was home to the West Coast's first shipyard, and residents and business owners say its economy never recovered after 1996, when the facility was closed by the U.S. Navy as the military pared spending following the end of the Cold War.

Housing Slump

The area has since been one of the hardest hit in Northern California by the housing market slump. Home prices in Solano County, which includes Vallejo, dropped 26 percent in March from the year before, according to DataQuick Information Systems, a firm which tracks real-estate markets in the state.

That helped fuel a projected sales tax drop of 7 percent to $12.4 million, according to city figures, while the taxes collected when property changes hands are expected to fall by more than $1.6 million.

Vallejo is also being hurt by its contracts with unions, which have wielded clout in the blue-collar town. As budget shortfalls emerged this year, the city has been unable to wrest permanent concessions from the police and firefighters that account for $58 million, or 69 percent, of the city's general fund budget last year.

Seeking Concessions

The permission to file bankruptcy may give the city more leverage with unions concerned that a federal judge might order more onerous cuts. Joanne Schivley, a city councilwoman, said Vallejo may stave off filing for protection from its creditors.

``We can pull the plug on bankruptcy at any time,'' she said.

Should Vallejo file, a federal bankruptcy judge must decide whether the city is actually insolvent. Assistant City Manager Craig Whittom said a plan to emerge from bankruptcy might include asking voters for more taxes.

Without additional revenue, he said, spending for road maintenance, libraries and health clinics may be curtailed. He said police and fire fighting services are already at minimum levels because of previous layoffs aimed at cutting public safety labor costs. Police no longer have enough officers to investigate property crimes, he said.

Businesses Suffer

Megan Bolton is feeling the squeeze. Bolton, who owns a commercial and residential window business with her husband, said building and remodeling fees rose fourfold last year, and she's had to pass it along to customers.

``Vallejo doesn't value businesses,'' said Bolton, 28.

Ivonne Johnson, a 38-year-old cheerleading and dance instructor, moved to Vallejo in October from San Francisco, looking to get away from crime and high-priced real estate. She stepped back from buying a home after she saw $80,000 cut from the asking price of one she was looking at. After this week's news, she's set her sights elsewhere.

``If city services are going to lose funding, and that means there might be less police officers who can respond, we're afraid it might turn into the kind of place we just left,'' she said.

To contact the reporter on this story: Michael B. Marois in Sacramento at; William Selway in San Francisco at

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