CITY CAN FINALLY EXIT BANKRUPTCY

Story first appeared on WSJ.com.
After nearly three years of winding its way through federal bankruptcy court, Vallejo, Calif., was cleared Friday to emerge from Chapter 9 bankruptcy protection.
A Judge of the U.S. Bankruptcy Court in the Eastern District of California signed off on Vallejo's debt-restructuring plan, which is the final step before the city can exit bankruptcy.
Vallejo became insolvent early in the 2008 financial crisis, and its emergence from bankruptcy protection is being closely watched by other struggling municipalities. Central Falls, R.I., filed for Chapter 9 bankruptcy protection Monday after the city and its public-safety unions failed to reach an agreement on contract concessions. And officials in Jefferson County, Ala., are working to avert bankruptcy by seeking to restructure $3.2 billion in debt tied to bonds sold for a new sewer system.
Vallejo filed for Chapter 9 after three consecutive years of budget shortfalls that depleted the city's cash reserves. At $50 million, it was the second largest municipal bankruptcy filing in California, trailing only Orange County's bankruptcy filing in 1994. Since seeking bankruptcy protection, Vallejo has spent more than $10 million on attorney and consultant fees.
Vallejo's finances had been particularly saddled by its labor contracts with police and fire unions. The unions' salary and benefits took up about 80% of the city's budget, which for the fiscal year that began July 1 is about $65 million. Before the bankruptcy filing, the city's budget was $78 million.
Vallejo's restructuring of some $50 million in debt calls for the city to reduce pension benefits for new employees, cut payments for retiree health care, raise pension contributions for current workers and creates a rainy-day fund. The city's largest creditors, Union Bank N.A. and bond insurer National Public Finance Guarantee Corp., along with its retirees and union members consented to the debt-restructuring plan in June.
Union Bank will be paid nearly 50% for some of its loans to the city. Debt payments to National Public Finance will be deferred for a year and interest payments will be lower.
Vallejo interim city manager said the city can't access debt markets even after it emerges from bankruptcy because it can't afford to pay for interest on loans. So Vallejo will need to stick to a five-year budget plan that anticipates flat revenue and maintaining the city's work force at its current level, he said. The number of city workers that are supported by the general fund budget now stands at 312, down nearly 40% from 2004. He added that it could still take some time before the city returns to normal. Vallejo has slashed the work force in its police department by nearly 50% since 2008; it is operating with about 90 sworn officers. The city also reduced the number of its firefighters by 42% since 2008 to about 70 and closed three of eight fire stations. He said he hopes to offset some of the losses by applying for public-safety grants.
To help raise revenue and address maintenance problems in buildings and streets, officials plan to put a ballot initiative before residents that would increase sales tax by one cent. The proposed tax is projected to raise more than $10 million for Vallejo.