Politics

VALLEJO (CBS 5 / AP / BCN) ― The city of Vallejo may be forced to declare bankruptcy as it grapples with a worsening budget crisis caused by falling tax revenue, rising payroll expenses and a slumping housing market.

The Vallejo City Council was expected to vote Thursday on whether to follow the city manager's recommendation to file for Chapter 9 bankruptcy protection, which would allow the city to renegotiate with its creditors.

City officials met in closed session at City Hall on Wednesday night to discuss the potential bankruptcy filing because of its budget deficits. Some officials, including Mayor Osby Davis, still held out hope that a resolution could be reached to avoid bankruptcy.

"Our financial situation is getting worse every single day. Bankruptcy is an option of last resort but there definitely is a chance it could happen," said Councilwoman Stephanie Gomes. "No city or private person wants to declare bankruptcy, but if you're facing insolvency, you have no choice but to seek protection."

The City Council on Wednesday night was also considering a fiscal emergency plan that called for slashing city salaries and job positions, as well as steep cuts in funding for the Public Service Department's maintenance budget and monies for community-based organizations.

Vallejo faces a $9 million budget shortfall for its fiscal year that ends in June, according to the most recent report by City Manager Joseph Tanner.

"Based upon the updated financial projections, the current estimate for insolvency is late April 2008," Tanner indicated.

Bankruptcy was listed as the fourth option in Tanner's report to council on Feb. 13. It has since moved to the top of the list, as officials now say insolvency could happen by the end of March.

The Solano County community is expected to generate $5 million less in revenue than projected because retail sales and property values are down amid an economic slowdown and weakening real estate market, according to Tanner's report.

Meanwhile, Vallejo faces soaring payroll costs for its firefighters and police officers, whose pay and benefits make up nearly 80 percent of the city's general fund budget.

Like many California cities, Vallejo promised its employees salaries, benefits and retirement packages that it can't afford to pay, signing generous labor contracts during economically flush times, said Marcia Fritz, vice president of the California Foundation for Fiscal Responsibility.

"It's a nightmare for city governments because they have to continue to pay these benefits that were granted when they had extra money from real estate and sales tax," Fritz said.

Vallejo officials had been negotiating to reduce pay and benefits to firefighters, police officers, electrical workers, and administrative employees - but failed to reach agreement with their unions. 

The worker contracts all expire in 2010 and the labor groups are not required to make any concessions. Those rollback talks broke down Monday, city officials said.

The city and union leaders said 21 veteran police and firefighters retired suddenly earlier this month out of fear the city would declare bankruptcy and they would not be able to receive accrued vacation and sick pay buy-outs that would cost an additional $4 to $5 million.

The city currently has a $135 million liability for the present value of retiree benefits already earned by active and retired employees and an additional $6 million a year as employees continue to vest and earn this future benefit, Tanner said.

Even if it declares bankruptcy, the city is expected to cut services, from police patrols to road repairs, to deal with its chronic budget troubles.

"Everything is going to feel the impact of it," said Councilwoman Joanne Schivley. "We're way past cutting the fat. We're cutting the bone now."

If the City Council approves, Vallejo—with a population of about 120,000 -- would be the first California city to declare bankruptcy because its revenues can't cover expenses, experts said.

"No California municipality has filed Chapter 9 bankruptcy, and there is very little case law guiding the potential outcome of such a filing. The risks of this option are significant," said Tanner.

In 2001, Desert Hot Springs, a small town in Riverside County, filed for bankruptcy after it lost a lawsuit to a developer, while Orange County declared bankruptcy in 1994 after it lost money in a series of bad investments.

Filing for bankruptcy protection will allow Vallejo to renegotiate contracts with employees, vendors and bondholders and protect it from lawsuits, but the move will damage its credit rating and lead to costly legal expenses.

More California cities could follow Vallejo's lead because they face the same toxic mix of declining revenue and ballooning employee expenses, experts observed.

"I don't think Vallejo is unique," said Mark Levinson, a bankruptcy attorney hired by Vallejo. "Vallejo is not the only city in California or the U.S. that is saddled with employee contracts that are burdensome."

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