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Vallejo, California—The Not So Funny Business of Being Broke

Vallejo, California Police
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Vallejo, California Police

If you want to see what may be in store for many cities, look at Vallejo, California.

Two years ago, the Bay Area city of 120,000 went into a special kind of bankruptcy reserved for local governments called Chapter 9. It allowed the city of break contracts and suspend debt payments.

The city just approved a budget which faced a $20 million deficit. Deciding not to raise sales taxes and unable to borrow ("Would you loan us some money?" the mayor jokingly asked me), the deficit was closed through more cuts, including the closure of yet another fire station.

Expect a lot more potholes.

Yet in the midst of this, police officers will receive a 7 percent raise Thursdayand have all of their healthcare costs covered. Total average salary with estimated overtime will now be $122,000, plus nearly $100,000 more in benefits and insurance costs. Sound insane? The city claims this was better than submitting to binding arbitration, which could have imposed an even bigger raise on Vallejo. Voters have since removed such arbitration from the city charter, but too late for this contract.

To cover the raise, 17 more officers will be let go, in a department which once numbered 155, but will now be 87.

It is a classic case of fiscal reality running head on into the cost of public safety, and it illustrates what may be a new chapter in tensions between management and unions.

The state of California, essentially bankrupt itself, plans to offload more state services onto cities like Vallejo. Folks, watch out.

Here are two revealing interviews.

The first is with Vallejo Mayor Osby Davis, a lawyer by trade.

"This is not a game anymore," he says, referring to collective bargaining. "The economy has tanked."

He has no idea when Vallejo will emerge from bankruptcy protection.

He doesn't expect to make bond payments for three more years.

The second interview is with Det. Mat Mustard, President of the Vallejo Police Officers Association, who says officers are just now being paid market wages.

"We gave up a tremendous amount of money."

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  • Based in Los Angeles, Jane Wells is a CNBC business news reporter and also writes the Funny Business blog for CNBC.com.

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