SACRAMENTO - Vallejo, Calif., and Union Bank of California are not close to an agreement to restructure the city's debt, according to testimony a bank official gave in bankruptcy court late last week.
Finance director Robert Stout told the Vallejo City Council in June that he thought the bank and the letter of credit provider would agree "very soon" to restructure the city's certificates of participation and reduce the penalty rate Vallejo owes on debt tendered to Union Bank.
However, "the discussions were general," said Cecilia Valente, a senior vice president for the bank, which provides letters of credit for $47 million of general-fund-backed variable rate debt. "We were there to listen."
Vallejo, which is 30 miles northeast of San Francisco, sought Chapter 9 bankruptcy protection on May 23. Its employee unions are contesting the filing on several grounds, saying the city is not actually insolvent and didn't negotiated in good faith with creditors to avoid bankruptcy, as required by law.
After the bankruptcy filing, the bank exercised a mandatory tender on the $47 million of general fund-backed variable-rate demand obligations for which it is the credit enhancer and liquidity provider. That's the vast majority of the $53 million of general fund municipal bond debt the city disclosed at the time of the bankruptcy.
Union Bank's mandatory tender on the VRDOs triggered a bank rate of 3% plus prime, or about 9%, but the city has said in court filings that it will not pay more than 6% on the debt while it's in bankruptcy.
In her testimony, Valente said city finance officials asked her if it would be possible to restructure the debts as fixed-rate bank bonds or to extend a letter of credit that expires in December of this year.
She said the discussions - which included one in-person meeting and several conference calls between March and May - never advanced to a stage where the city or the bank made specific proposals on interest rates or restructuring the debt because the city could not give Union Bank long-term financial projections until it reached labor settlements.
"That's what we can underwrite to," she told the court.
Union lawyers are arguing that the city's bankruptcy filing is unnecessary and an excuse to break labor contracts, not a real attempt to adjust its debt with all its creditors. In their filings, they've said the city could have avoided bankruptcy by accepting union wage concessions, cutting spending, raising revenues, and borrowing money from city funds outside the general fund.
In its filings, the city responded that temporary labor concessions would not have given Vallejo a long-term solution to its financial woes and contested the unions' contention that it has money it could have legally tapped to avoid bankruptcy.
Bankruptcy court Judge Michael McManus, in the U.S. Bankruptcy Court of the Eastern District of California, last week took three days of testimony on the question of the city's eligibility for bankruptcy. Testimony is set to continue in early August.
