SAN FRANCISCO - The Vallejo, Calif., City Council is scheduled to consider a recommendation tonight to file for Chapter 9 bankruptcy protection.
The San Francisco Bay-area city of 120,000 would be the largest California city to declare bankruptcy and the largest municipality to seek protection from creditors since Orange County in 1994.
The city and its enterprise funds had $201.1 million of bonds and certificates of participation outstanding as of June 30, 2007. Vallejo faces a projected $16 million deficit in its $93 million general fund next year.
The city has been negotiating with employee unions for five months, seeking concessions that would allow it to avoid bankruptcy. It had failed to reach an agreement to avert bankruptcy as of press time yesterday. City manager Joseph Tanner placed the bankruptcy recommendation on the council's agenda for tonight.
"It's not a happy choice, but you can't just hope that gold is discovered under city hall," said Marc Levinson, a bankruptcy attorney at Orrick, Herrington & Sutcliffe LLP, the city's lawyers. "Something has to happen. Either you have to cut a deal where the city gives and the unions give, and maybe you raise revenues to pay the bills, or you file the bankruptcy case."
Vallejo Mayor Osby Davis and several City Council members have opposed bankruptcy for fear that it would derail economic development efforts. Others on the council have argued that it would show the city's unions that it's time to renegotiate labor agreements.
The city's budget deficit ballooned late last year as the housing market collapsed, cutting into excise and property transfer tax collections. Sales tax revenue is expected to come in 10% below budget this year, and overall revenues are projected to fall 2% in fiscal 2007-2008 and 1% next year.
Expenditures are projected to rise 5% this year and 3% next year. The bulk of the increase is for salaries. The city was also on the losing end of an arbitrator's ruling on fire department staffing levels, which cost $4.3 million.
Under its labor contracts, Vallejo owed public safety employees a 10% raise this year. Earlier this year, police and firefighters took a 6.5% pay cut to delay insolvency.
Since its financial woes became public, it has suffered a wave of retirements, pushing up overtime costs and payouts of accrued leave.
Without a deal, the city faces a choice between filing bankruptcy and chaos, Levinson said. Bankruptcy would give Vallejo breathing room to continue negotiations with its unions, but it would be expensive. The city estimates it could cost $2 million.
"Bankruptcy is the last alternative," Levinson said. "The idea of spending all the money on me and the other lawyers instead of spending it on police and fire is ridiculous."
Under Chapter 9, bondholders with a lien on a specific revenue stream would be first in line for payment, but unsecured bondholders would have to stand in line like any other creditors, he said.
"The city wants to do as little damage to its access to the capital markets as possible," Levinson said. "That's no small consideration."
But the city will have few options if it cannot lower its expenses.
"The reason Orange County was able to escape bankruptcy was that it was able to sell new bonds because it was creditworthy," Levinson said. "Vallejo can't sell new bonds because no one's going to loan it money because it has an unbalanced budget and has no reserves."
