California Suburb Vallejo Faces Bankruptcy

A San Francisco Bay Area suburb grappling with declining revenue and ballooning employee expenses may become the first city in the state to declare bankruptcy.

The Vallejo City Council was expected to vote Thursday on whether to follow the city manager's recommendation to file for Chapter 9 bankruptcy protection, which would allow the city to re-negotiate with its creditors.

"Our financial situation is getting worse every single day," said Councilwoman Stephanie Gomes. "No city or private person wants to declare bankruptcy, but if you're facing insolvency, you have no choice but to seek protection."

Like many California cities, Vallejo promised its employees salaries, benefits and retirement packages that it can't afford to pay, signing generous labor contracts during economically flush times, said Marcia Fritz, vice president of the California Foundation for Fiscal Responsibility.

"It's a nightmare for city governments because they have to continue to pay these benefits that were granted when they had extra money from real estate and sales tax," Fritz said.

More California cities may file for bankruptcy because they face the same toxic mix of falling tax revenue, rising payroll expenses and a slumping housing market, experts say.

"I don't think Vallejo is unique," said Mark Levinson, a bankruptcy attorney hired by Vallejo. "Vallejo is not the only city in California or the U.S. that is saddled with employee contracts that are burdensome."

Vallejo faces a $9 million budget shortfall for its fiscal year that ends in June, according to the most recent report by City Manager Joseph Tanner.

The city of 120,000 across the bay from San Francisco is expected to generate $5 million less in revenue than projected because retail sales and property values are down amid an economic slowdown and weakening real estate market, according to the report.

Meanwhile, Vallejo faces soaring payroll costs for its firefighters and police officers, whose pay and benefits make up nearly 80 percent of the city's general fund budget.

Vallejo officials have been negotiating to reduce pay and benefits to firefighters and police officers, but have so far failed to reach agreement with their unions.

Even if it declares bankruptcy, the city is expected to cut services, from police patrols to road repairs, to deal with its chronic budget troubles.

"Everything is going to feel the impact of it," said Councilwoman Joanne Schivley. "We're way past cutting the fat. We're cutting the bone now."

If the City Council approves, Vallejo would be the first California city to declare bankruptcy because its revenues can't cover expenses, experts say.

In 2001, Desert Hot Springs, a small town in Riverside County, filed for bankruptcy after it lost a lawsuit to a developer, while Orange County declared bankruptcy in 1994 after it lost money in a series of bad investments.

Filing for bankruptcy protection will allow Vallejo to re-negotiate contracts with employees, vendors and bondholders and protect it from lawsuits, but the move will damage its credit rating and lead to costly legal expenses.

© 2008 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.