Vallejo sole California town to OK bankruptcy-Moody's

NEW YORK May 8 (Reuters) - Vallejo, the only California city whose council has approved a bankruptcy filing, probably will be a "unique case" in the state because money problems afflicting other cities and counties are smaller and have different causes, Moody's Investors Service said on Thursday.

Vallejo's fiscal crisis comes against the backdrop of the state's budget troubles as California copes with shrinking tax revenues and one of the highest home foreclosure rates in the United States.

If Vallejo, a former Navy town of more than 100,000 people in the San Francisco Bay area, follows through on the City Council's vote late Tuesday night to declare bankruptcy, it "would be only the second city in the state ever to file" for such relief from creditors, Moody's said in a statement.

"This would also be the largest municipality in the state, measured by revenues or population, to file for bankruptcy in the state since the Orange County bankruptcy in 1994," Moody's said.

The difference, though, is that Vallejo is preparing to declare bankruptcy because it appears to be running short of money to pay for basic city services, while Orange County filed for bankruptcy almost 14 years ago after the county's finances ran aground on soured investments linked to derivatives.

Some analysts believe that Vallejo, about a 22-mile drive north of Berkeley, California, is preparing for a possible bankruptcy to pressure city workers to accept less generous pay.

Moody's, which does not rate Vallejo's debt, included labor contracts in its list of problems that Vallejo faces.

"These would include the loss of its industrial economic base, unrealistic budgeting practices, and particularly challenging labor contracts, which have precipitated a severe, near-term liquidity crisis," Moody's said.

California's housing slowdown and rapidly deteriorating state budget are hurting other cities and counties in the state, Moody's said.

But it added: "Based on our annual credit surveillance, we believe that Moody's-rated California cities and counties are generally well positioned to manage these challenges."

Vallejo's debt was not actively traded on Thursday, but on Wednesday, some bonds fell in price. Vallejo City Unified School District debt maturing in 2015, insured by MBIA Inc, traded at 95 to 96 cents on the dollar on Wednesday versus 115 cents on the dollar on March 3, according to BondDesk.

Standard & Poor's on Wednesday cut its underlying rating on Vallejo's certificates of participation, which are secured by motor vehicle license fees, to "B" from "A" and placed them on its "CreditWatch" with developing implications. (Reporting by Joan Gralla and Anastasija Johnson in New York, and Jim Christie in San Francisco; Editing by Jan Paschal)