SAN FRANCISCO — A U.S. bankruptcy court has ruled that Vallejo, Calif., is insolvent.
Vallejo, a city of 117,000 about 30 miles northeast of San Francisco, filed for protection from creditors under Chapter 9 of the federal bankruptcy code on May 23, becoming the biggest municipal bankruptcy since Orange County, Calif., in 1994. The city began the current fiscal year with no reserves and faced a $17 million deficit this year.
“The city was insolvent as of the date the petition was filed,” Michael McManus, chief judge of the U.S. Bankruptcy Court for the Eastern District of California, said in a written ruling released on the court’s Web site Friday afternoon. “With no reserves and a multimillion dollar deficit, the general fund would not have sufficient funds and cash flow to pay its debts as they become due.”
The ruling means that Vallejo is officially bankrupt and can move on to arguments about overturning its collective bargaining agreements, as well as negotiations with creditors on a plan to adjust its debts.
Unions for city police, firefighters, and other workers fought the bankruptcy filing, arguing that the city understated its resources and overstated its obligations in its bankruptcy filing to find a way out of its labor contracts.
The workers told McManus that Vallejo could transfer money from outside the general fund to cover its bills, and they asked the judge to consider the city’s solvency in light of $10 million in concessions the unions offered, not their contracts.
“The court rejects the unions’ argument that the city is not an eligible debtor under Chapter 9 based on the existence of the unions’ offer,” McManus wrote. “Insolvency is determined based on the city’s obligations as of the petition date, as those obligations actually exist, not as they could exist under hypothetical circumstances.”
McManus said the unions failed to show that Vallejo could have regained solvency even if it had accepted the labor concessions. Given its inability to pass a balanced budget this year, the judge said the city could not legally borrow from outside the general fund.