Bay Area Suburb to Vote on Bankruptcy to Deal with Budget Crisis

VALLEJO, Calif. (AP) - Vallejo officials and union representatives met for last-minute negotiations Thursday ahead of a city council decision on whether to file for bankruptcy to deal with a deepening budget crisis.

The Vallejo City Council was scheduled to vote Thursday night on
whether to seek bankruptcy protection while it grapples with a budget deficit caused by onerous labor contracts, a slowing economy and a rash of home foreclosures.

If the council approves the move, the Bay Area suburb would become the first California city to declare bankruptcy because of a budget shortfall. In 2001, Desert Hot Springs filed for bankruptcy protection after it lost a lawsuit to a developer.

"We've run out of options," said City Councilwoman Stephanie Gomes. "Bankruptcy is one of the very last options, but unfortunately that's where we are now."

The city faces a $9 million budget deficit for its current fiscal year ending in June and is set to run out of money at the end of March, according to City Manager Joseph Tanner, who recommends the bankruptcy filing.

Vallejo, a mostly blue-collar city of 120,000 about 30 miles northeast of San Francisco, has been hit especially hard by the mortgage crisis and has one of the nation's highest foreclosure rates.

The city, home to a Six Flags amusement park and a shuttered naval shipyard, is collecting less tax revenue than projected as retail sales and property values decline amid an economic downturn.

At the same time, Vallejo faces escalating costs for its police and firefighters, whose pay and benefits make up nearly 80 percent of its general fund budget.

Over the past several weeks, city officials and public safety unions have been trying to reach a deal on labor contract changes that could help Vallejo stave off bankruptcy and resolve its chronic budget problems. They met again Wednesday and Thursday, but so far no agreement has been reached.

Filing for bankruptcy protection would protect city officials from lawsuits and give them time to renegotiate contracts with employees, vendors and bondholders. But the move will lead to costly legal expenses and damage its credit rating and ability to sell municipal bonds - not to mention its reputation.

"There's a stigma to entering bankruptcy, but people and companies survive and can come out stronger," said Mark Levinson, a bankruptcy attorney hired by Vallejo.

Whether or not the city files for bankruptcy, Vallejo residents are being warned about reductions in police patrols, library hours, road repairs and other services.

Many California cities are paying attention to Vallejo's plight because they're also struggling with financial problems caused by shrinking revenue and ballooning employee expenses.

"The solution that comes out for Vallejo may very well be a model for other cities facing fiscal challenges," said Marcia Fritz, vice president of the California Foundation for Fiscal Responsibility.

(Copyright 2008 by The Associated Press. All Rights Reserved.)

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