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VALLEJO (CBS 5 / AP / BCN) ― The city of Vallejo filed Friday for bankruptcy protection to deal with a ballooning budget deficit caused soaring employee costs and declining tax revenue.

The Bay Area community of about 120,000 residents is the largest California city to declare bankruptcy, which will protect the city from its creditors while it develops a plan to return to fiscal health.

Mayor Osby Davis said the city's attorneys filed papers electronically seeking Chapter 9 bankruptcy protection in federal court in Sacramento just after 11 a.m.
 
"We've exhausted all avenues at this point, and this is all we had left," Davis said. "I had hoped to avoid it all the way up until yesterday. It's something we can't avoid ... We can't pay our bills."

Vallejo will ask a judge to set a June 9 deadline for creditors to challenge the filing, said Marc Levinson, the city's bankruptcy attorney.

The city's police and firefighter unions plan to file a legal challenge, arguing that the city's finances aren't as dire as officials claim and there are other ways to fix the budget deficit, said Mat Mustard, vice president of the Vallejo Police Officers Association.

"Filing for bankruptcy is and was unnecessary," Mustard said. "Yes, I believe they have a financial crisis, but I think they're turning their crisis into a catastrophe by going into bankruptcy."

The seven-member City Council unanimously voted to authorize the city manager to file for bankruptcy on May 6 after months of failed negotiations with its public safety unions.

After that vote, city officials and union representatives continued to meet in hopes of reaching a last-minute deal to stave off bankruptcy, but the two sides couldn't reach an agreement.

City leaders wanted employee contracts to be reworked through 2012, while the unions proposed contract wage and benefit concessions only through 2010.

Some officials blame the city's chronic financial crisis on the labor contracts which they claim provide overly generous pay and benefits to the city's police officers and firefighters.

Those city workers salaries comprise about three-quarters —$74 million— of Vallejo's general fund budget.

The unions maintain compensation for Vallejo's public safety employees is in line with that of other Bay Area cities, and blame the fiscal crisis on government mismanagement and poor decisions by previous city councils.

Vallejo, a mostly working-class city, faces a $16 million deficit in its 2008-2009 budget that begins July 1. It claimed it would have no money to pay employees at that time unless it filed bankruptcy.

The real estate crisis and economic downturn have caused a sharp decline in revenue from sales tax, property tax and development fees. Solano County, where Vallejo is located, has been hit especially hard by the mortgage crisis and has one of the nation's highest foreclosure rates.

Other cities around the country could find themselves in the same position as Vallejo because they're also struggling with skyrocketing employee expenses and falling revenues, experts observed.

"If the economy doesn't turn, you're going to see other cities in the same spot," said Marcia Fritz, vice president of the California Foundation for Fiscal Responsibility. "You're seeing a lot of cities and counties where reserves are being drawn down to pay for benefits."

In addition to being the largest California city to declare bankruptcy, Vallejo also is the first to do so because its revenues cannot cover expenses, experts noted.

Orange County filed for bankruptcy in 1994 after it lost money in a series of bad investments; the Southern California town of Desert Hot Springs declared bankruptcy in 2001 after losing a lawsuit.

Some officials worry that bankruptcy could damage the city's reputation and ability to attract residents and businesses, but others say the city could eventually emerge stronger and more financially secure.

"The mismanagement of the city for so long has tarnished our reputation, not bankruptcy," said Councilwoman Stephanie Gomes. "Bankruptcy gives us the opportunity to fix that mismanagement and put a long-term plan in place to ensure true growth and recovery."

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