Vallejo, California, Plans to File for Bankruptcy

Discussion in 'Wall St. News' started by THE-BEAKER, May 8, 2008.

  1. May 7 (Bloomberg) -- Vallejo, California, officials voted to file for bankruptcy because the San Francisco suburb isn't able pay its bills after costs for police and firefighters soared and the housing market's slide cut into tax revenue.

    The city council's unanimous decision last night will make Vallejo the largest California city to file for bankruptcy and the first in the state to seek protection from creditors because it ran out of money to pay for basic services. The decision came after it failed to win salary concessions from labor unions.

    The city of 117,000 is facing ballooning labor costs and declining housing-related tax revenue that have left it with a $16 million deficit forecast for the year starting in July. In bankruptcy, creditors will be kept at bay while officials devise a plan to balance the books. City services would still operate.

    ``Nobody wants bankruptcy, but there doesn't appear to be a whole lot of options left,'' said city councilwoman Joanne Schivley. ``We are going to be out of money by June 30. It's all a numbers game now.''

    Cities and towns rarely go bankrupt. Since 1937 there have been 543 municipal bankruptcies, two-thirds of which were small tax 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 file was Desert Hot Springs, a town of 20,000 north of Palm Springs that was hit with a legal judgment it couldn't afford. Orange County filed in 1994 amid bad bets on derivatives.

    Cost Squeeze

    Vallejo's plight stems from rising pay for police and firefighters under current labor contracts, including minimum staffing requirements, which have caused overtime compensation to increase. The problems were compounded by plunging home values, declining retail sales, and a slowdown in new housing development that cut $5 million from the city's revenue projections between June and February. The closure of the local Wal-Mart store also pinched the city's sales tax receipts.

    Police and firefighting salaries, pension and overtime consume almost 80 percent of Vallejo's $89 million general fund budget. Cities in California on average spend about 60 percent of their budgets on firefighter and police salaries, according to the League of California Cities.

    City and labor union officials have been meeting since January to revise the existing contracts. The unions have balked at pay cuts. By filing for bankruptcy, Vallejo is asking a judge to step in and force salary concessions from the labor unions.

    Judge's Decision

    Once Vallejo files its petition, a federal bankruptcy judge must decide whether the city is actually insolvent. If so, the case can proceed. If the judge rules Vallejo isn't legally broke, the case would be dismissed, said the city's bankruptcy attorney Marc Levinson of Orrick, Herrington & Sutcliffe.

    The fiscal strains afflicting Vallejo are reverberating across the U.S., as a housing slump and slowing economy curb revenue for states and local governments. Even so, no other California city, including those bordering Vallejo, has been pushed into insolvency because their revenue wasn't enough to pay day-to-day expenses.

    Vallejo may be a unique case, given that no municipalities in areas such as Riverside County that have been hardest hit by the housing market rout are known to be considering bankruptcy, said Standard & Poor's analyst David Hitchcock.


    Some residents are angry at city officials.

    ``It's a sad day when the officials we elected to lead this city just throw up their hands,'' resident Kenneth Shoemaker told the board prior to the vote.

    U.S. state sales-tax collections fell in the first quarter for the first time in six years, according to a study by the Nelson A. Rockefeller Institute of Government in Albany, New York.

    California Governor Arnold Schwarzenegger's office predicted the state's budget deficit may reach $20 billion, more than twice the size of previous estimates and enough to account for nearly one-fifth of the budget. States overall expect to have at least $26 billion less than they need to pay bills in the next budget year, according to an April report by the National Conference of State Legislatures.

    S&P today lowered the ratings on Vallejo's certificates of participation, a type of bond backed by its share of the state's vehicle license fees, to B from A, given the uncertainty of how the revenue source would be dealt with under bankruptcy, the rating company said in a statement. It also lowered the rating on Vallejo Public Financing Authority's bonds to B from A-.

    `Difficult Day'

    Orange County in Southern California filed the biggest municipal bankruptcy in U.S. history in December 1994 after former Treasurer Robert Citron's wrong-way bet on interest-rate derivatives lost $1.6 billion. The county of 3 million people is the third-most populous in California after Los Angeles and San Diego Counties.

    ``It's a sad and difficult day in Vallejo,'' said Orange County Treasurer Chriss Street. ``Now, it's time to stop the blame game and time to start the management game. People need to start understanding that there's a pot of money and it can only go so far. The city is going to need learn to live with different expectations.''

    Vallejo, on the San Francisco Bay, was home to the West Coast's first shipyard, and residents say its economy never recovered after it was shuttered in 1996 as the U.S. military closed facilities after the end of the Cold War.

    Hard Hit

    The area has since been one of the hardest hit in Northern California by the housing market slump. Home prices in Solano County, where the town resides, dropped 19 percent in January from the year before, according to DataQuick Information Systems, a firm which tracks real-estate markets in the state.

    There are currently 1,214 ``real estate owned'' homes in Vallejo, meaning that the homeowners have been foreclosed and their lenders now own the houses, according to Irvine, California-based RealtyTrac, which sells data on foreclosures. Another 1,014 properties are in the foreclosure process, and 464 houses are scheduled to be auctioned.
  2. vince111


    the gov't can only tax so much on property taxes on home, food, energy and income, before they become partners taking 50% of gross income.

    that is more tax rate than a communist country.
  3. vince111


    if it wasn't for gov't food subsidies on food production, americans could be paying 50% of gross on food like third world'll be seeing riots.
  4. It doesn't help that city employees have been getting paid a ton of money.

    For example, police officers and firefighters were averaging over $150k per year in that small city I believe.

    If you are looking to work a second job or just can't make it as a trader, go apply for a firefighter job in a major city.

    Yes, it could be life-threatening, but not many jobs offer six-figure income potential very quickly and doesn't require any formal education.

    Competition for these positions is fierce though....