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U.S. Municipalities That Went Bankrupt

Year of filing: 2008

With a population of 116,000, the Bay Area city of Vallejo became the largest California city at the time to file for bankruptcy in 2008. Starting in the fiscal year 2005-6, the city began running deficits, with expenditures exceeding revenues in its General Fund by $3 million to $4 million per year and the fund projected to be depleted by June 2008.

During this time, it was reported that more than 75 percent of the municipal budget went toward personnel compensation and pension funds. The city could not reach an agreement with its creditors and ultimately incurred another $8 million in legal fees to file for bankruptcy.

Things just got worse after it filed for Chapter 9. Prostitution and crime surged as the police force was cut by 40 percent, while funding for public buildings like libraries, senior center funds and firehouses were cut. This all occurred in the beginning of the recession, where home values plunged and many found their homes underwater or were forced into foreclose.

Vallejo has used some creative solutions to fix the city and generate revenue. To compensate for the police cuts, high-tech cameras were installed across the city to allow neighborhood watch groups to stop crimes. The city council also struck a deal with residents: If they approved a one-penny sales tax increase, the new revenue — $9.5 million — would be used in whatever way voters chose.