California city has deal to stave off bankruptcy

VALLEJO, California Fri Feb 29, 2008 1:16am EST

1 of 4. A man is reflected in the window of a vacant bedding store in Vallejo, California February 27, 2008.

Credit: Reuters/Robert Galbraith

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VALLEJO, California (Reuters) - Officials in Vallejo, California hammered out a financial agreement late on Thursday with police and fire-fighters that may allow the cash-strapped former Navy town to avoid becoming the first sizeable city in the state to file for bankruptcy.

"A tentative agreement has been reached," Mayor Osby Davis said during an emergency meeting of the Vallejo City Council.

Details would be made public on Friday, Davis added.

The deal came amid calls by some city officials for Vallejo to declare bankruptcy as it is on track to run out of cash next month, the result of rising pay and pension packages for emergency personnel over several years running up against declining tax collections.

Marc Levinson, an Orrick, Herrington and Sutcliffe lawyer advising Vallejo, said before Thursday's council meeting that the city's financial problems are not like those that triggered other California municipal bankruptcies.

The legendary 1994 bankruptcy of Orange County, California was followed by bad investments. A costly legal struggle tipped Desert Hot Springs, California to file for its lesser known bankruptcy in 2001.

"I can't tell you of a case where the city just says 'We just can't pay,'" Levinson said.

Bankruptcy protection would allow Vallejo additional leverage in contract talks with its police and fire-fighters, whose pay consumes 80 percent of the city's general fund, but at the cost of having a shadow cast over its credit rating.

That is usually enough to push local governments to get their finances in order, according to James Spiotto, a municipal bankruptcy attorney with Chapman and Cutler in Chicago.

He noted the United States has about 55,000 governmental entities and since 1937 only 554 have gone into bankruptcy.

People in Vallejo, on the outer northeast edge of the San Francisco Bay area, have been stunned by the possibility their city could join that list.

Resident and realtor Fred Sessler said bankruptcy could make it impossible for Vallejo to sell bonds to redevelop both its downtown and waterfront area: "Two major projects that we thought would lift Vallejo are in jeopardy."

Vallejo home owners like Allen Wildermuth also are anxious. They fear the stigma of bankruptcy could drag down home prices, which are already on the decline.

The "taint" may scare off buyers, Wildermuth said, noting Vallejo's homes market is a major source of its financial troubles.

Blue-collar Vallejo's economy long relied on the U.S. Navy's neighboring Mare Island shipyard. When the Navy closed the base in the mid-1990s, Vallejo became a bedroom community.

Property taxes were healthy when California's housing market was running hot earlier this decade, but recently those revenues have been on the slide along with demand for housing.

Vallejo, with a population of roughly 130,000, now is in one of the region's hardest hit housing markets. Like other markets where home purchases were financed with risky mortgages in recent years, foreclosures are on the rise.

Sales of homes in Vallejo, including houses and condominiums, fell 31.9 percent in January from a year earlier while the median price of a home bought in the city fell 29.4 percent to $290,000 over the same period, according to real estate information service DataQuick Information Systems.

(Editing by John O'Callaghan)

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