California city might file for bankruptcy

SAN FRANCISCO — A San Francisco Bay Area suburb grappling with declining revenue and ballooning employee expenses postponed a vote Thursday on whether to become the first city in the state to declare bankruptcy over a budget shortfall.

The Vallejo City Council pushed the vote back until Monday after city officials and the police and firefighters unions reached a tentative deal to cut labor costs, a union leader said. Pay and benefits for firefighters and police officers make up nearly 80 percent of the city's general fund budget.

"I think it's a good start to getting Vallejo on a solid economic path," said Kurt Henke, president of the International Association of Firefighters, Local 1186. "I think everyone's committed to doing everything we possibly can to avoid bankruptcy."

Officials did not release details of the agreement.

The city manager had recommended that the city file for Chapter 9 bankruptcy protection, which would allow the city to renegotiate with its creditors.

"Our financial situation is getting worse every single day," council member Stephanie Gomes said earlier. "No city or private person wants to declare bankruptcy, but if you're facing insolvency, you have no choice but to seek protection."

Like many California cities, Vallejo promised its employees salaries, benefits and retirement packages that it can't afford to pay, signing generous labor contracts during economically flush times, said Marcia Fritz, vice president of the California Foundation for Fiscal Responsibility.

"It's a nightmare for city governments because they have to continue to pay these benefits that were granted when they had extra money from real estate and sales tax," Fritz said.

More California cities may file for bankruptcy because they face the same toxic mix of falling tax revenue, rising payroll expenses and a slumping housing market, experts say.

"I don't think Vallejo is unique," said Mark Levinson, a bankruptcy attorney hired by Vallejo. "Vallejo is not the only city in California or the U.S. that is saddled with employee contracts that are burdensome."

Vallejo faces a $9-million budget shortfall for its fiscal year that ends in June, according to the most recent report by City Manager Joseph Tanner.

The city of 120,000 across the bay from San Francisco is expected to generate $5-million less in revenue than projected because retail sales and property values are down amid an economic slowdown and weak real estate market, according to the report.

"Everything is going to feel the impact of it," said council member Joanne Schivley. "We're way past cutting the fat. We're cutting the bone now."

California city might file for bankruptcy 02/28/08 [Last modified: Thursday, October 28, 2010 9:19am]

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