According to the city council Vallejo Is On Brink Of Bankruptcy.

The city of Vallejo is on the brink of becoming the first California city ever to declare bankruptcy, City Council members said Tuesday. Vallejo may run out of cash as early as March, council member Stephanie Gomes said.

“Not only that, but now we have 20 police and fire employees retiring because they are afraid of not getting their payouts,” Gomes said. “That means we have another few million dollars in payouts that we had not expected. So the situation is quite dire.”

For 15 years the city council has been putting Band-Aids on the problem. (It has been) extending contracts and deferring payments for public safety to the next years as a way of balancing the current budget.”

Public safety contracts for police and fire services make up 80 percent of the city’s general fund.

“We’ve been spending more than we’ve been making for 20 years and it’s time to pay the piper,” Gomes said.

In a report to the City Council dated Feb. 13, Vallejo Finance Director Rob Stout projected that without deep cuts, including assumed agreements negotiated with police and fire departments by June 30, the City will be $6 million in debt and will have spent every last penny of its $4 million in reserves.

Gomes said the city has a plan to cut $20 million out of the budget in the next year.

That emergency spending plan could devastate city services. The police and fire unions must agree on the spending cuts before it can be considered.

The Feb. 26 city council meeting takes place the same day the City Council plans to vote on the plan. n a report to the City Council last week, City Manager Joseph Tanner said the city faces a $10.1 million general fund operating deficit for the current fiscal year and a negative available fund balance of $5.9 million on June 30, 2008.

“Based upon the updated financial projections, the current estimate for insolvency is late April 2008,” Tanner said. “It may become necessary for staff to recommend that the City Council consider filing and pursuing Chapter 9 bankruptcy in the event the city is unable to meet its existing obligations with its existing revenues,” Tanner said in the report.

An [emergency] plan calls for cutting city salaries to 5 percent lower than June 30, 2007 starting on March 28. Police and firefighter salaries under the existing labor agreements would be reduced 15 percent, by 8 percent for the electrical workers and 5 percent for confidential, management and un-represented employees.

Thirty general fund positions would be eliminated, 16 of which are currently filled and will require layoffs. Other vacant positions could be filled by transferring employees but the reductions would reduce the general fund positions from 494 to 411, or by 17 percent.

“No California municipality has filed Chapter 9 bankruptcy, and there is very little case law guiding the potential outcome of such a filing. The risks of this option are significant,” Tanner said.

Huge Warning Shot

The city of Vallejo just fired one huge warning shot for a situation that is going to play out nationwide. Here are the issues.

  • City and state governments have negotiated salary arrangements that are not affordable.
  • City and state governments have guaranteed pension benefits to teachers, fire fighters, police, and other city and state employees that cannot possibly be met.
  • Taxpayers cannot possibly afford higher taxes to pay bloated pension benefits of government workers in sweetheart deals.
  • Should Vallejo file for bankruptcy, there will likely be a ripple effect in the pricing of municipal bonds.

Unions will not like this one bit but the decision is eventually going to come down to taking a shot at payouts in bankruptcy proceedings or dramatically reducing pay scales and pension benefits. Even if Vallejo avoids bankruptcy now, the issue is likely to resurface down the road, and not just at Vallejo, but across the nation.

Making matters worse are hundreds of underfunded pension plans, all with absurd assumptions about returns that will not be met. This recession is going to wreak havoc on those assumptions.

Perhaps Buffett needs to think twice about rushing into the municipal bond guarantee business. Then again, perhaps he sees this warning shot and prices things accordingly. Ultimately, the cost of insurance is going up and pension benefits and union wages are going to drop. The implications are ominous.

Mike “Mish” Shedlock
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