Other Troubled Cities Watch Vallejo, Calif., Chap. 9 Filing

Bankruptcy move by Bay Area city reflects labor costs, shrinking tax revenue, and deficit — a common problem for municipalities.
Stephen TaubMay 27, 2008

The City of Vallejo became the largest California municipality to file for bankruptcy protection under Chapter 9 of the U.S. Bankruptcy Code. But around the state and the nation, the move is being watched by other communities with financial difficulties.

The Associated Press said soaring labor costs and shrinking tax revenue, creating a $16 million deficit, forced the San Francisco suburb into the filing. The city said in a press release
that it intends to continue normal business operations throughout the bankruptcy process.

With the U.S. economy limping along, other cities are particularly aware of the path Vallejo is choosing to maneuver through imbalances between tax receipts and expenses. Those expenses include fixed union contracts, overtime, pensions, and other costs associated with delivering typical municipal services.

Other cities “might not be at the crisis point we’re in today, but sooner or later they’re going to get there,” Vallejo Mayor Osby Davis told the AP.

“The solution that will come out of Vallejo may very well be a model for other cities facing similar fiscal challenges,” Marcia Fritz, vice president of the California Foundation for Fiscal Responsibility, told the wire service. “If Vallejo turns out better after declaring bankruptcy…that will be an avenue (other cities) look at to break contracts.”

According to the AP, 34 U.S. cities, counties and towns have filed for Chapter 9 bankruptcy protection since 1980.

Back in early March, the California Foundation for Fiscal Responsibility said in a press release that the root cause of problems plaguing Vallejo was “promised increases in wages and benefits for government employees that are not supported by tax revenues.”

“While Vallejo encourages its workers to reduce hours, leave, or retire, CFFR believes the city would serve its citizens better by encouraging its workers to stay on the job longer,” it stated. “This ‘work longer’ strategy reduces retirement costs, retains the City’s most experienced and productive workers, preserves cash otherwise spent to reimburse employees for accrued sick and vacation pay, and it provides a permanent fiscal fix instead of a temporary patch.”

Among its recommendations: Stop making retroactive pension payments to recipients who had already been paid in full for their services under the terms of their contracts; adopt a second tier pension plan for new hires; reduce compensated absences to its employees for sick leave and vacations; and discontinue allowing employees to purchase up to five years of service credits to add to the years worked for purposes of computing their pension benefits.