Feeling the Pinch

Vallejo bankruptcy filing may be the tip of iceberg

where its expenditures were growing faster than its revenue. Second, the city fell victim to the “put off till tomorrow what it could’ve done today syndrome” regarding expenditures and revenues issue. Last, bad management decisions were a factor.

“Our contracts are going up at such a rapid pace,” says Davis, who explains that providing medical benefits for retirees has become too expensive since people are living longer. The city paid out $5.4 million in compensated absences for people who retired, and based upon current contracts, unions were entitled to a total of 13.7% in pay increases, making the city responsible for about $5 million annually in raises added to the budget, Davis says.

“The relationship between the labor unions and the administration had become so strained that it was impossible to work through,” he adds. In the meantime, the city awaits a federal judge’s decision on whether it is insolvent and eligible for the bankruptcy filing.

It can take several years to come up with a plan to get it approved, with the city paying a certain amount of the debt owed to creditors over the next 10 to 20 years, Spiotto says. “There’s no quick payment for pre-petitioned debt,” Spiotto says.

He also says filing for bankruptcy could’ve been avoided if the city had an oversight or refinancing commission on the state level to review the city’s financial process. He points out that refinancing and oversight authorities are created to help local governmental bodies resolve financial distress. There are two fundamental advantages: financial credibility and access to capital markets if the city has an assured source of revenue to pay debt service, which is isolated from bankruptcy and other credit risk; and access to a variety of fiscal tools to enforce fiscal discipline, since the commission would be an independent entity removed from the political pressure of the local government.

There is nothing legislated in California to allow the state to offer assistance to Vallejo, and “the state, to some degree, is the one who has to create the authority. …it is difficult to do it on a local level,” Spiotto says, adding that there are a number of states that have oversight authorities.

And given the stigma associated with bankruptcy, Spiotto says he was somewhat surprised with Vallejo’s unanimous city council decision to file. “The pain is so much in a municipal market you have to pay more interest…and cutting public services,” he says.
Vallejo is already bracing for the leper treatment. Two major redevelopment projects may be shelved indefinitely because it would need bonds issued to build the infrastructure, which would be too expensive now that the city’s gone bankrupt.

“Not many people would want to take a chance on a community that filed for bankruptcy,” Davis says, explaining that when you file for bankruptcy, it “really means that you have dishonored a promise you made to your employee contracts that you have.”

Davis says the city still looks the same, other than the loss of some employees, and that, for the most part, some

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