The Uneasy Resolution of the Vallejo Bankruptcy

The Wall Street Journal reports today that Vallejo may be nearing the end of the bankruptcy process that's cast a cloud over the northern California city since 2008. In January, the city submitted a plan for leaving bankruptcy, and is negotiating with its various creditors after reaching an agreement with its largest debt holder, Union Bank of San Francisco, and the bond insurer National Public Finance Guarantee Corp. The city's original bondholders and NPFGC won't suffer from the bankruptcy, as the city has either paid them in full or agreed to full repayment over time, but Union Bank stands to lose about $20 million of the $50 million Vallejo owes it. And, after a ruling from U.S. Bankruptcy Judge Michael McManus, the bank is unlikely to ever see that $20 million. No further cuts to city jobs will occur, and current employees will maintain present salaries and pensions, though health care benefits to retirees and their spouses will be cut substantially.

Of course, it's important to remember how we got to this point: reckless government spending at a time of declining tax revenue. In the years leading up to the bankruptcy filing, Vallejo's expenses shot up at a rate of 11% annually, in no small part due to absurd contracts with police and firefighters unions that ultimately consumed 70% of the city's budget. These police and firefighters took big hits in the bankruptcy, as Vallejo let go over a third of its police force and nearly half of its firefighters, while closing three of its fire stations, followed by 2009 agreements that slashed pensions for new hires in these departments. Unions and retired public employees, of course, continue to fight the city over lost benefits and pay. Other services, including libraries and recreation centers, have also been cut back. All told, Vallejo has spent roughly $9 million in legal costs to see itself through the bankruptcy.