SAN FRANCISCO Vallejo, Calif., on Tuesday asked a bankruptcy judge for permission to reject labor contracts and said it plans to cap interest payments on its outstanding municipal debt.
The city said it continues to negotiate with Union Bank of California, the letter-of-credit provider on most of its $53 million of general-fund backed certificates of participation. But the new filings mark its first move to violate muni market contracts.
"The city will limit its debt service payments to an amount not greater than 6% per annum, regardless of what the applicable interest rate on that debt may be pursuant to the issuing documents," Vallejo's bankruptcy lawyers said in a filing with the U.S. Bankruptcy Court in Sacramento. "Although the city has not yet conferred with all of its creditors, the city intends to determine an appropriate adjustment for each of its debts as part of the comprehensive plan of adjustment."
Vallejo, which is about 30 miles northeast of San Francisco, filed for Chapter 9 bankruptcy protection last month to escape labor contracts that elected officials and city manager Joseph Tanner said the city could no longer afford. Officials have repeatedly said they intend to continue to pay bond debt, but the city must also convince bankruptcy Judge Michael McManus that it is treating creditors equitably, not forcing police, firefighters, and other employees to bear the entire cost of the bankruptcy.
"It's difficult to justify why a man who runs into a burning building or an officer who risks getting shot every time he pulls someone over on the street needs to lose salary when no one else is being asked to suffer," said Dean M. Gloster, a bankruptcy lawyer for police, firefighters, and other city employee unions.
Gloster, a partner at Farella Braun + MartelLLP in San Francisco, said the unions plan to contest the bankruptcy on the grounds that the city could pay its bills if it chose to make painful decisions that would increase revenues and cut expenses. McManus has given creditors until June 27 to contest the bankruptcy filing.
This week's news deals with two more steps in the bankruptcy process: the creation of a pendency plan that will allow the city to continue operating during the bankruptcy, and the rejection of the city's collective bargaining agreements.
The city asked McManus to allow it to reject union contracts because it cannot possibly afford them with existing revenues or any new fees it has the discretion to impose.
"While the city has other debts it must adjust, the city cannot restore balance to the general fund unless it restructures its labor costs as a key element of any plan of adjustment," Vallejo's lawyers said. "In each fiscal year, the largest general fund expenditure the city incurs is the cost of labor, and the largest portion of the city's labor costs is paid to police and firefighters."
The bankruptcy court yesterday scheduled a hearing on rejection of union contracts for July 23.
If the judge allows the city to reject the collective bargaining agreements, the unions will ask for tens of millions of dollars in damages, Gloster said. The proportion of those claims that eventually get paid will depend on the terms of the "plan of adjustment" the judge agrees to when the city exits bankruptcy.
Before the bankruptcy, Vallejo forecast a $17 million deficit for the coming fiscal year. Under the pendency plan announced late Tuesday, the city plans to build a $1 million reserve.
The plan, which does not require judicial approval, will go into effect at the beginning of the new fiscal year July 1. It calls for rolling back employee salaries, limits on debt service payments and severe reductions in non-essential city services. For example, the city would cut all funding for its symphony and senior citizens center in the upcoming budget year.
Vallejo says it cannot afford recent interest interest-rate increases on $49 million of variable-rate COPs backed by Union Bank. About $1.2 million of the debt has been put back to the bank. The rates on the balance still in the hands of bondholders have jumped to 6% from just over 3% before the bankruptcy filing.
Under the pendency plan, the city will not pay more than the current 6% rate. That would violate terms of its letter of credit agreement with Union Bank. The agreement calls for an escalating penalty rate of prime plus up to 3% on bonds that are put back to the bank. The city expects the amount of COPs turned in to the bank to increase over the coming fiscal year, with the penalty rate rising to 8% or 9%.
Vallejo finance director Robert Stout last week told the City Council that he has asked Union Bank to take over as its lender on the entire amount and to cut its interest rate to less than 6%. Neither city officials nor the bank will comment on the ongoing negotiations.