Vallejo, which filed for Chapter 9 bankruptcy protection last month, would renege on promised pay increases for city workers but continue to make its full debt service payments under a fiscal 2008-2009 budget proposed by city manager Joseph Tanner this week.

City staff proposed a $78.7 million general fund budget that reduces spending by 10% and builds a $1 million reserve. Revenue is projected to fall 7.8% next year to $79.7 million for the fiscal year that begins July 1. The decrease in spending is bigger than the decrease in revenue because the city expects to run a $4.2 million deficit in the current fiscal year, spending the last of its general fund reserves.

Tanner balanced the budget by holding salaries and benefits constant for city workers, cutting most vehicle replacements, transferring $1 million from a risk fund that the city uses to self-insure for purposes such as workers compensation, and maintaining the closure of two fire stations. The budget includes $2.2 million of debt-service payments and assumes an interest rate of about 6% on $49.4 million of outstanding variable-rate general fund-backed certificates of participation.

“The only way to balance our budget is to violate our agreements with our employees,” said finance director Robert Stout. “We want at all costs to avoid non-payment of any of our debt.”

Revenue took a hit from a decrease in sales taxes due to the closure of the local Wal-Mart store, a decrease in real-estate transfer taxes, the end of a revenue sharing agreement with Six Flags amusement park, and a $1 million cut in state aid.

The budget does not include new fees and taxes the staff is proposing. Stout said the city is working to increase revenue by about $1.45 million in the coming year by raising emergency services fees.

Mayor Osby Davis said Vallejo must also go to voters with a sales tax hike as soon as possible.

“We have one of the lowest sales tax rates in all of the Bay Area,” Davis said. “We need to ask everyone to pitch in and help out,” including taxpayers.

The City Council will vote on the budget proposal June 24. The budget gives a hint of what the city’s bankruptcy exit plan — or pendency plan — will look like when it is proposed to federal bankruptcy Judge Michael McManus in the next couple of weeks.

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