Slump, Costs, Put Vallejo on Brink of Bankruptcy

A San Francisco suburb that has been hit hard by the sagging housing market is on the verge of going broke. Officials in Vallejo, Calif., will decide whether to declare bankruptcy this week, as they face big increases for police and fire protection — and sagging tax revenues.

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MELISSA BLOCK, host:

Now, to California where a town outside San Francisco is on the verge of going broke. Vallejo, California has been hit hard by the sagging housing market. This week, town leaders will decide whether to declare bankruptcy.

NPR's Richard Gonzales reports.

RICHARD GONZALES: More than 200 people packed a hastily called town hall meeting in this blue-collar, former Navy town about 30 miles north of San Francisco.

Ms. STEPHANIE GOMES (Member, Vallejo City Council): Why are we here tonight? Because the city is facing a very severe deficit. We are on the brink of bankruptcy.

GONZALES: Stephanie Gomes is one of two city councilwomen who called this meeting to help explain to the public what bankruptcy might mean for the city of 120 thousand residents.

Ms. GOMES: And the council was told this: if the city doesn't do something by mid-April, we won't be able to pay employees' salaries.

GONZALES: The city budget faces a six-million-dollar shortfall. Gomes places a large part of the blame on contracts, the police and firefighters unions that chew up more than 80 percent of Vallejo's general fund.

Ms. GOMES: I think one of the good things about all of this attention on the potential for bankruptcy is that the public safety union have finally agreed that our numbers are real. Up until two weeks ago they said we were lying about the numbers and there was no fiscal crisis. So now, maybe, we can come face to face and get some real, honest negotiations and look at those contracts and negotiate fair wages and fair benefit packages.

(Soundbite of applause)

GONZALES: Gomes says Vallejo's budget problems were exacerbated by a 10 percent hike in police and firefighter salaries this fiscal year. But the unions say don't blame them for Vallejo's fiscal crisis. Fire Captain Jon Riley says his union's contract was negotiated fairly. Meanwhile, worries that the city will go broke recently prompted the mass retirements of 14 firefighters and seven police officers. Riley says they wanted to get out while the city still has some cash to pay retirement benefits.

Mr. JON RILEY (Veteran Fire Captain; Vice President, Firefighters Union Local 1186): I think it would be safe to say that morale in the Vallejo Fire Department has pretty much hit rock bottom. We lost about 325 years of experience that left in one day last week. Our department is pretty devastated at this moment.

GONZALES: This labor dispute couldn't come at a worse time. Assistant City Manager Craig Whittom says Vallejo is also being squeezed by the downturn in the housing market.

Mr. CRAIG WHITTOM (Assistant City Manager, Vallejo, California): Our sales tax, our core property tax, our transfer tax is flat or in decline as with many other communities. And Vallejo does not have a large corporate tax base. So in times when the residential market slows down, we are hit hardest.

GONZALES: That's also true of many other California cities. But urban finance experts say Vallejo is an extreme case because of its high public safety costs. Meanwhile, some Vallejo residents, like retiree Thomas Atkinson(ph), say there's plenty of blame to go around.

Mr. THOMAS ATKINSON (Vallejo Resident; Retiree): The city put themselves in this position. The voters elect the city councilmembers. And so, ultimately, I think it resolves with the citizens not paying attention to what was going on. Now, they're starting to pay attention, now that they're, you know, in this horrible situation.

GONZALES: Others, such as Russ Barnes, who runs a marine construction company, are taking a wait-and-see approach.

Mr. RUSS BARNES (Vice President, Marine Construction, Cooper Crane & Rigging): In 10 years, the city of Vallejo is still going to be here. We will work through this somehow. The sky is not falling. It is scary. It is unsettling. It is distracting, but Vallejo is a wonderful town.

GONZALES: In Vallejo, the sky may not be falling, but the boom times are definitely over. Many believe there's a silver lining in the dark cloud hanging over the city, but they're still trying to figure out how to get to it.

Richard Gonzales, NPR News, San Francisco.

BLOCK: What happens when a municipality goes bankrupt? You can find out at npr.org.

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What Happens When City Hall Goes Bankrupt?

1975 cover of New York Daily News: 'Ford to City: Drop Dead'

hide captionNew York City didn't actually declare bankruptcy in the 1970s, but it came close. When the city appealed to Washington in 1975 for a bailout, President Ford balked, prompting this famous New York Daily News headline.

New York Daily News

Moments in Municipal Bankruptcy

  • 1975, New York City: The Big Apple teeters on the verge of bankruptcy but is rescued at the last minute, thanks to a loan from the federal government and other measures.
  • 1991, Bridgeport, Conn.: The city, population 140,000, declares bankruptcy after a dispute with the state.
  • 1994, Orange County, Calif.: The county declares bankruptcy after officials make a series of bad investments. It was — and still is — the biggest municipal bankruptcy in U.S. history.
  • 1995, Pittsburgh: The city escapes bankruptcy — barely — by selling its water plant.
  • 1995, Washington, D.C.: The nation's capital is in danger of bankruptcy but is rescued when the White House and Congress establish a financial control board for the city.
  • 2000, Camden, N.J..: The state of New Jersey takes over the faltering city. It's the biggest city takeover in the country since the Great Depression.
  • 2008, Vallejo, Calif.: Faced with a budget crisis, city officials contemplate filing for bankruptcy protection.

We know that individuals and corporations can declare bankruptcy, but entire cities?

That is exactly what officials in Vallejo, Calif., are contemplating. And they are not alone. There's a long and sad history of municipalities declaring bankruptcy. Here's a look at how these places got into hot water — and what life is like for residents of a bankrupt town.

Why do cities and towns declare bankruptcy?

For the same reason that individuals and corporations do. They're broke and can't pay their debts. This might be because of an unexpected expense — say, a costly lawsuit — or a sudden shortfall in revenue, due to falling property values, for instance. Either way, declaring bankruptcy protects cities and towns from their creditors, just as it does for individuals and corporations. (In Vallejo's case, bankruptcy offers another benefit: It would allow the city to renegotiate costly labor contracts with public-safety employees, which reportedly account for about 80 percent of the city's general fund budget.)

The one main difference: Municipalities can't liquidate assets to pay off their creditors — the mayor can't sell the town fire engine to pay the bank.

Have municipalities always been able to declare bankruptcy?

No. For most of U.S. history, cities and towns were not eligible for bankruptcy protection. But during the Great Depression, more than 2,000 municipalities defaulted on their debt, and they pleaded with President Roosevelt for a federal bailout. "All they got was sympathy," reported Time magazine in 1933. Instead, Roosevelt pushed through changes to the bankruptcy laws that allow towns and cities to file for bankruptcy. They even got their own section of the bankruptcy code: Chapter Nine.

How many municipalities have sought bankruptcy protection?

Since 1980, 32 cities and towns have declared bankruptcy, according to James Spiotta, a leading municipal bankruptcy lawyer. Most notable of these were Bridgeport, Conn., population 140,000, which declared bankruptcy in 1991. And, in the nation's biggest municipal bankruptcy, Orange County, Calif., sought protection from its creditors in 1994 after city officials made a series of bad investments.

What is life like in a "bankrupt" city or town?

In one sense, life goes on as usual. Police and fire departments still respond to 911 calls; the garbage is still collected. But don't expect that new bridge or school to be built. For a bankrupt city, all new projects must be approved by a majority of creditors. The biggest hit, though, is to the city's image. Bankruptcy carries a much greater stigma for a city than for a corporation, which is why officials go to great lengths to avoid Chapter Nine.

If a city or town declares bankruptcy, does it affect others nearby?

Yes. Surrounding cities and towns can find it harder to borrow money for new projects because investors — who buy and sell bonds — will question their financial viability. That's why states often intervene to prop up a faltering municipality and avoid the sting of bankruptcy. Sometimes all it takes for a town or city to get help from the state capital is the mere threat of bankruptcy. "It's an instrument of getting attention and getting others to help you," Spiotta says.

What about New York City? Didn't it declare bankruptcy in the 1970s?

No, but it came close. The city was teetering on the edge of bankruptcy in 1975 when it appealed to Washington for a bailout. President Ford balked, prompting the famous Daily News headline "Ford to City: Drop Dead." (Ford never actually uttered those exact words.) In the end, Congress did pony up some money for New York, and the city formed the Municipal Assistance Corp. — a quasi-government body that, in effect, allowed New York to lend money to itself. Other big cities — Philadelphia, Pittsburg, Miami — have flirted with bankruptcy in recent decades but not actually declared it.

Are we likely to see more towns and cities declare bankruptcy in the future?

That's difficult to say, but some experts believe the warning signs are clear: unfunded pension liabilities, an anemic economy, costly infrastructure repairs and falling property values. "All of the ingredients are there," Spiotta says. "I wouldn't be surprised if we start to see more bankruptcies."

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