February 21, 2008 / 11:46 PM / 10 years ago

California city mulls filing for bankruptcy

SAN FRANCISCO, Feb 21 (Reuters) - Vallejo, California, a former Navy town northeast of San Francisco, may file for bankruptcy because its employee costs are rising too much as its revenues slow, a City Council member said on Thursday.

Officials in the blue-collar town between San Francisco and the state capital of Sacramento expect a $4 million budget surplus to swing to a $6 million shortfall by the end of the fiscal year in June. They anticipate that deficit to widen more next year.

”As of April, we will not have the money to pay employees,“ Vallejo Councilwoman Stephanie Gomes said in a telephone interview. ”It’s just projected to get worse and worse.

“If we can’t get all the pieces to come together ... then the city should declare bankruptcy,” Gomes said.

Vallejo’s revenues are down as California’s economy slows.

But Gomes said the city is most burdened by rising payroll and retirement costs for its emergency personnel -- concerns that many local governments share.

Vallejo officials are now threatening to slash spending widely and follow the example of Desert Hot Springs, California, which filed for bankruptcy in 2001.

That bankruptcy was overshadowed by the most dramatic municipal bankruptcy in the United States -- Orange County, California’s mid-1990s meltdown after it lost at least $1.5 billion from bad investments.

“Bankruptcy has been talked about casually for about the last year or so ... In December, it started to be looked at seriously,” Gomes said, noting the City Council could vote to take the plunge next week.

They should think hard about that because the stigma of bankruptcy is not easy to shake in the municipal debt market, said James Spiotto, a municipal bankruptcy specialist at the Chapman and Cutler law firm in Chicago.

“It isn’t something to go into lightly ... People do keep lists of who goes in,” Spiotto said.

However, the threat of bankruptcy may force a compromise with city employees that buys the city time to get its books in order.

“To some degree, it’s a good idea to bring people to the edge of the cliff to look over to realize it’s not a good idea to jump and hope somebody catches you in mid-flight,” Spiotto said.

Standard & Poor’s Ratings Services on Thursday expressed its concern by placing Vallejo’s “A”-rated water revenue bonds on “CreditWatch” status with negative implications. (Reporting by Jim Christie; Editing by Jan Paschal)

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