California city has deal to stave off bankruptcy

By Jim Christie

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.