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http://www.mercurynews.com/breakingnews/ci_8330114
Vallejo bankruptcy could have far-reaching impact
By J.M. Brown and Sarah Rohrs
02/21/2008 09:16:15 PM PST
VALLEJO -- If Vallejo becomes one of the first California cities to file for bankruptcy, the negative effects could be far-reaching, but also may leave the city with a fresh start, experts said Thursday.
If it takes this route, Vallejo would still need to keep its doors open and provide municipal services, though employees may be asked to stay home if there's nothing in the coffers to pay them.
"The city would still be there and would still have to provide services for residents. With the city you can't just disappear," said Orange County Supervisor John M.W. Moorlach, an expert on bankruptcy since his own county took this route in 1994.
Through Chapter 9 protection, a federal bankruptcy judge would sort through the city's finances, labor and other contracts, and then work out a fiscal plan to move forward.
The situation is different than that of the Vallejo City Unified School District which plunged into a deep fiscal hole in 2004, and secured a $60 million state bail-out loan.
City officials have warned that declaring bankruptcy will not print money, or generate any revenues.
Vallejo's potential bankruptcy would not be California's first municipality filing for Chapter 9 bankruptcy.
Orange County filed for bankruptcy in 1994 after a series of bad investments. And Desert Hot Springs, a town of 20,000, sought Chapter 9 protection several years ago after a crushing court judgment on an environmental matter, said Marc Levinson, Vallejo's bankruptcy attorney.
Experts say Vallejo's case undoubtedly will raise speculation about municipal bonds that cities use to fund facility improvements and other activities because the once-certain guarantee of profitability will suddenly look poisonous to investors.
Bankruptcy is certain to spark fresh debate about the cost of unfunded employee benefits, and the impacts on bond holders.
As of December, the city had accrued a $135 million liability for the present value of retiree benefits earned by active and retired employees earned. Further, there is a $6 million added cost as current employees continue to vest and earn future benefits, the city said.
"If bond holders are hurt by a bankruptcy, then future lenders will probably put constraints on elected officials' ability to make promises while in office that must be paid after they leave," said CPA Marcia Fritz, vice president and treasurer for California Foundation for Fiscal Responsibility, which advocates for pension reform.
"It's almost a relief that it's finally coming to this in Vallejo because it will be an example of what happens when you've got a lot of people with their fingers in the cookie jar," she said. "I saw this coming years ago."
While some experts argue that bankruptcy can leave a city in better financial shape, others argue that it will hurt Vallejo's future credit rating and place the city's future in the hands of a federal bankruptcy judge.
The Vallejo school district is nervously keeping an eye on the city's fiscal emergency. District spokesman Jason Hodge said the crisis might cause the city to withdraw funding for campus police officers, and after-school programs.
The Chapter 9 process, which Vallejo has budgeted $1 million to pursue, could last for years until repayment plans are OK'd.
Experts agree one thing is certain. If the city cannot pay its employees because the general fund is dry -- which is predicted to happen by April -- City Manager Joe Tanner must instruct all employees to stay home.
"They can't come to work," said Levinson, Vallejo's bankruptcy attorney. "You can't ask for credit or to extend your credit if you know you can't repay the debt. It's not only common sense, it's the law."
Alan Davis, attorney for the police and fire unions whose leaders are negotiating with the city to erase an immediate $10 million shortfall, declined comment. The unions represent employees whose salaries total 80 percent of Vallejo's general fund.
The unions argue they have deferred salary increases and benefits for years while the city has failed to raise enough money to pay them.
For nearly two years, city and union officials have been haggling behind closed doors -- then in arbitration -- over cuts in salary and disputed staffing levels.
Nearly two-dozen police and firefighters retired last week or are expected to retire in coming days at a cost of at least $4 million in accrued sick and vacation time. The city is locked into contracts with the unions for two more years.
"Once granted, collectively bargained retirement promises can't be reversed, no matter how outrageous, and no matter how much citizens scream when they find out," Fritz said. "Bankruptcy may be the only way for Vallejo to legally break these promises and get control of its finances."
City bankruptcy attorney Levinson said he would rather see Vallejo reach compromises with the unions than file bankruptcy. That's a decision the City Council could consider Tuesday when it weighs an emergency fiscal plan calling for citywide layoffs.
Interim Fire Chief Russ Sherman agrees, saying, "It's a nightmare situation -- something that everyone has worked long and hard to try to prevent. I'm still holding out optimism that we can get to some sort of agreement to avoid bankruptcy because there would be no winners."
But Arthur J. Spector, the former chief bankruptcy judge of the U.S. District Court, Eastern District of Michigan, said bankruptcy may indeed make winners out of those who seek it.
In an interview Thursday, Spector, now a bankruptcy attorney in Florida, said any entity having a hard time getting credit because of crushing debt will only have a harder time the longer it waits to receive protection from creditors. Bankruptcy may eventually lead to a fresh, or at least fresher, start, he said.
"If you can't can you get credit today, tell me how bankruptcy would hurt your credit?" he said.
Orange County Supervisor Moorlach said Vallejo's problem is that it's spending more than it's taken in each year, and it's "creating obligations it never could afford and never should have made."
Vallejo's situation could be a forecast of what faces other municipalities which have agreed to "unsustainable employee and pension agreements," he added.
While rare, other cities and municipal districts nationwide have felt similar pressures of dropping revenues and increasing expenses enough to file for bankruptcy or publicly consider it, like New York City.
Bridgeport, Conn., a city of 140,000, shocked the investment world in 1991 when it filed for Chapter 9 protection due to a $17 million deficit on its $300 million budget. Bridgeport faced $220 million in general obligation debt.
Based on Chapter 9 provisions, a city's creditor separates into committees of unsecured creditors, like employees and contract services, and secured creditors with collateral-based debt, like bondholders. The city would then work to reach payment plans.
"Unsecured creditors don't have to be paid," Fritz said. "Anyone doing business with the city of Vallejo, like the garbage company, will be the first to get hit. Payments due them are not going to be paid right away."
A judge would rule on any payment agreements based on a city's financial ability and other factors, then oversee litigation if a city can't reach a deal with creditors. But a judge won't typically scour a city's books to see if it could draw money that it isn't already.
"A judge won't throw out creative solutions," Levinson said. "It's really up to the players to come up with the deal. You continue to try to achieve peace rather than going to war. War is expensive."
As the city works out deals, investment specialists are going to have a harder time selling municipal bonds, especially in California due to the state's $14 billion budget shortfall.
"Outside investors are getting spooked by our fiscal imbalance," Fritz said. "Once the city goes down in Vallejo, you're going to see bond prices dropping like flies. A whole specter of bonds will get hit by one bad apple -- it happens all the time on Wall Street." |
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Sat Feb 23, 2008 9:12 am |
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Dave Starr
F L I N T O I D
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| At least it isn't Bezerkeley. |
_________________
I used to care, but I take a pill for that now.
Pushing buttons sure can be fun.
When a lion wants to go somewhere, he doesn’t worry about how many hyenas are in the way.
Paddle faster, I hear banjos. |
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Sat Feb 23, 2008 10:55 am |
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