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Federal Court: Vallejo Officially Bankrupt

SACRAMENTO - A U.S. federal court ruled late Friday that Vallejo, Calif., is bankrupt, ending a battle over its solvency and forcing the city and its creditors to begin negotiating a plan to adjust the city's debts.

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 a projected $17 million deficit.

"The city was insolvent as of the date the petition was filed," said Michael McManus, chief judge of the U.S. Bankruptcy Court for the Eastern District of California, in a written ruling. "With no reserves and a multi-million 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 the city is officially bankrupt. The case will proceed to arguments on Vallejo's motion to overturn its collective bargaining agreements, as well as negotiations with creditors on a plan to adjust its debts. Vallejo has $53 million of variable-rate debt outstanding at the time of the filing. It has since paid down $7 million, using unspent proceeds. The majority of the rest is held by Union Bank of California, the liquidity provider. The city, in its pendency plan, said it would not pay more than 6% on that debt.

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.

McManus rejected their arguments and suggested he sees little possibility that the unions' contracts will be able to survive the bankruptcy.

"Given that the labor costs are a majority of the city's general fund expenditures, it is clear from the evidence that achieving solvency will require, among other things, serious consideration of economic concessions from the city's labor groups," McManus said in his ruling.

The city has pushed hard to speed the bankruptcy proceedings, calling the unions' objections a waste of time and money, but McManus gave the unions as much time as they wanted to make their case against the bankruptcy.

Vallejo budgeted $2 million for bankruptcy expenses for this entire fiscal year, but it spent $1.1 million in just the first month and a half of the proceedings, according to Joann West, the city's public information officer.

The city workers - represented by the Vallejo Police Officers Association, the International Association of Firefighters, and the International Brotherhood of Electrical Workers - hired one of California's best-known budget analysts to review the city's books and suggest ways to return to solvency.

McManus lambasted the testimony by Harvey M. Rose Associates principal Roger Mialocq as lacking credibility because the budget analyst admitted that he took the case in part because he was worried about the impact of a municipal bankruptcy on the interest rates his other clients would have to pay.

Still, McManus said Mialocq's testimony showed that even the unions' own consultant couldn't balance the city budget without rejecting labor contracts. The unions had asked the judge to consider the city's solvency in light of $10 million in concessions they offered, not their contracts.

He refused.

"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."

The judge also rejected union suggestions that the city had extra money outside the general fund that it could use to offset bankruptcy, agreeing with city assistant finance director Susan Mayer that those funds can only be tapped for short-term loans that can be repaid within a year. That wasn't possible this year because the city couldn't pass a balanced budget, he said.

To a large degree, the ruling returns the city and its unions to the position they were in before the bankruptcy - facing each other over a negotiating table. The employee unions had offered the city a temporary $10 million salary reduction, while the city was pushing for permanent changes in contracts, including removal of minimum staffing requirements for its police and fire departments.

Both sides seem to have gotten the message that it's time to negotiate a settlement.

"We are willing to continue working with city officials to craft a comprehensive plan that restores Vallejo's financial stability and allows us to continue providing vital services to the people of our community," the unions said in a statement released by their lawyer, Dean Gloster, of Farella, Braun + Martel in San Francisco. "We reiterate this $10 million offer."

The city also issued a statement calling for renewed negotiations.

"While past attempts to negotiate modifications to collective bargaining agreements to ensure long-term solvency have been unsuccessful, the city is hopeful that the labor associations will reengage and the parties will be able to agree on modifications to the labor agreements that provide such long-term solvency," Vallejo officials said in a press release.

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