Vallejo to Become Largest CA City to File for Bankruptcy

By: Jason Dearen AP
By: Jason Dearen AP

VALLEJO, Calif. (AP) - Vallejo is set to become the largest California city to declare bankruptcy after leaders voted in favor of the solution to its spiraling budget crisis.

The city council voted unanimously Tuesday night following hours of public comment and months of failed negotiations with police, fire and other unions.

City Manager Joseph Tanner and the city's finance director had advised filing for bankruptcy before its fiscal year ends on June 30 because Vallejo faces a projected budget deficit of $16 million and has no money in its reserves.

The San Francisco suburb of 117,000 people also is expected to generate $5 million less in revenue than projected because retail sales and property values are down amid an economic slowdown and slumping real estate market, according to a report issued by Tanner.

Many officials and residents attribute Vallejo's fiscal troubles to overly generous pay and benefits to the city's police and firefighters. The salaries for police and firefighters currently take up 75 to 80 percent of the city's general fund.

Representatives from police, fire and electrical workers unions all argued against the Chapter 9 bankruptcy protection, saying that doing so would only make hiring already short-staffed public safety agencies even harder.

Other critics warned that if a bankruptcy judge does not rule in the city's favor, the legal costs of the proceedings could sink the city further in debt.

The city's mayor, Osby Davis, resisted filing for bankruptcy, arguing that it would stigmatize Vallejo and hurt future economic development. But after months of personally negotiating with the unions, Davis conceded Tuesday that there were no other options that he could find.

"It's time to do something different. I don't like it. I don't want it," he said before voting for bankruptcy protection.

The seven-member council all said the process of making the decision was difficult and emotional.

"Honestly, if there are any more options out there, I would like someone to tell us what they are," said Councilwoman Joanne Schivley, who then recited her phone number twice for people to call her with ideas.

City leaders said filing for bankruptcy will not immediately allow them to fill the potholes on untended streets or add more detectives to the undermanned police force. But they hope, if a judge rules in their favor, it will allow them to restructure union contracts and other debts in a way that allows the city to turn itself around financially within the next few years.

In addition to being the largest California city to declare bankruptcy, Vallejo will be the first city in the state to do so because its revenues cannot cover expenses, experts say.

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

"There is a stigma associated with bankruptcy that's not necessarily warranted," said Sajan George, an Atlanta-based financial turnaround consultant who worked on the Orange County bankruptcy.

"My message to residents of Vallejo is, this is not a death knell and should not be equated with that," George said. "We put together plan for Orange County, issued municipal bonds that allowed county to emerge from Chapter 9 a couple of years later, and now Orange County is thriving."

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

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