Vallejo, Calif., City Manager Pushes Chapter 9

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SAN FRANCISCO - The city manager of Vallejo, Calif., is recommending that the city declare Chapter 9 bankruptcy.

After running several years of general fund operating deficit, the city's financial position has weakened significantly this year, both because of the general economy and conditions specific to Vallejo, according to a staff report prepared by city manager Joseph Tanner.

Without "very significant actions," the city will not be able to meet its existing general fund expense obligations after April 1, the report said. Tanner did not return a phone call yesterday.

The City Council is scheduled to meet Thursday to consider filing for bankruptcy.

Vallejo, located in Solano County about 30 miles north of San Francisco, has about 120,000 residents.

The city government and its related enterprises had about $201.1 million of outstanding bonds and certificates of participation as of June 30, according to the city's most recent comprehensive annual financial report.

That figure excludes more than $56 million of COPs that were retired in July following the sale of a city-owned amusement park to its private operator. The figure also excludes more than $50 million of conduit debt, according to the CAFR.

Much of the city's debt is in the form of revenue bonds for its water system as well as wastewater COPs for the Vallejo Sanitation and Flood Control District.

The city's outstanding debt includes $11.7 million of tax allocation bonds for redevelopment projects, and $26.6 million of COPs for "governmental activity," as opposed to enterprise activities like water and wastewater.

Standard & Poor's placed several Vallejo credits on CreditWatch with negative implications Friday because of the potential bankruptcy filing, noting that the agency does not maintain any issuer credit rating or underlying general fund appropriation-backed rating on city bonds.

The action affects A-rated Vallejo wastewater debt, water revenue bonds, and Series 1999 city capital improvement project COPs, and A-minus-rated Vallejo Public Financing Authority revenue bonds for a community assessment district.

All the credits in question are backed by pledges that "may qualify as special revenues for which there is a limited exception from automatic stay provisions under federal bankruptcy law," but credit implications from the possible bankruptcy remain uncertain, according to Standard & Poor's.

The city's general fund reported $81 million in revenue and $83 million in expenses in fiscal 2007, according to the CAFR.

Since the adoption of the city's fiscal 2008 budget last summer, city staff has reduced revenue projections by $5 million, due primarily to slowdowns to collections of sales taxes, property transfer taxes, and development fees, largely because of the local real estate slowdown.

The city also was on the losing end of an arbitrator's ruling on fire department staffing levels, at a projected cost of almost $4.3 million.

Since Feb. 13 alone, the staff report said, more than 20 city employees have filed for retirement, which will cost the city $2.5 million in payouts for unused leave.

The resolution before the council Thursday would approve a Chapter 9 filing, and authorize the city to hire several firms to assist with the bankruptcy and the city's fiscal emergency plan, including law firm Orrick, Herrington & Sutcliffe LLP and financial advisers Public Financial Management.

According to the city's staff report, a Chapter 9 filing by Vallejo would be the first such filing by a large California municipality that was not triggered by a one-time event.

The state's best-known Chapter 9 filing, by Orange County in 1994, was triggered by reversals in the county investment pool.

"There is very little case law guiding the potential outcome of such a filing," the Vallejo report said. "The risks of this option are significant. Despite these risks, staff believes the city's current financial condition requires this petition."

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