SAN FRANCISCO — The Vallejo, Calif., City Council unanimously approved a bankruptcy workout plan last week that outlines the city's aims in negotiations to end the biggest municipal bankruptcy since the mid-1990s.
The five-year financial plan calls for a three-year moratorium on debt service payments, sharp cuts in retiree health benefits, possible further cuts in services, and possible tax increases.
The plan aims to match revenues and expenses over the next five years, while beginning to fully accrue and amortize retirement benefit costs.
"It's an attempt to set the framework for negotiations with all of our creditors — the banks, the bondholders, the employee groups," said finance director Robert Stout. "It's also a blueprint to achieve long-term financial stability and sustainability."
The plan represents the clearest look yet at how the city hopes to exit bankruptcy. Since seeking Chapter 9 bankruptcy protection in 2008, city revenues have dropped $20 million, or 20 %.
The city has cut its workforce by a quarter over five years. It has discarded collective bargaining agreements in bankruptcy court. Yet under its latest projections, Vallejo still faces annual deficits of $23 million to $27 million once retirement costs are fully recognized.
Stout and the city's finance staff gave policymakers several options for bringing long-term expenses and revenues into alignment, including deep cuts to already bare-bones police and fire services and $4.5 million of property or sales tax increases that would have to be approved by voters to forestall the deepest service cuts.
The recommendations on the city's $389 million of long-term debt — mostly unfunded retirement liabilities — were simpler: They have to be reduced dramatically.
Under the workout plan, Vallejo will propose a three-year moratorium on payments on its $51.6 million of bonds to create a $5 million fund that would be used to discharge an estimated $50 million of unsecured creditor claims for damages under the bankruptcy.
The bulk of the general fund debt is held by Union Bank of California, which was the letter of credit provider for the city's variable-rate demand obligations.
Under the plan, the city would accrue no interest on the bonds for four years, and it would not begin to pay down the principal at reduced, but unspecified, interest rates until fiscal 2013-14.
Officials hope to save even more by paring back retiree health benefits. It aims to reduce benefits for retired workers to $300 a month, which is the cost of the Kaiser Permanente Health Maintenance Organization's Medicare supplement plan for a single retiree in the San Francisco Bay Area.
The city currently offers family coverage that can cost up to $1,300 a month. Reducing benefits as proposed would cut Vallejo's unfunded actuarially accrued health care liability to $34 million from $135 million.
The proposal drew lines of retirees and city workers to decry the proposal during the public comment period of the council meeting. While members of the five-person council said they regretted the cuts, they passed the proposed plan unanimously.
"Health care costs are going up for everybody," said City Council member Joanne Shivley. "If you think that the city can continue to absorb those costs forever, think again."
The workout plan is not a fait accompli. Vallejo still has to negotiate over the proposed reductions with bondholders and labor groups. If it cannot convince a majority of its creditors to go along with the changes, it would have to convince U.S. Bankruptcy Judge Michael McManus to force the reductions on creditors.
