September 16, 2008
Judge rules California city bankrupt
Vallejo, California, is about to become an interesting case study in what happens to municipal union contracts when a city goes bust. Because Vallejo is now bankrupt. Not nearly bankrupt as New York City as in 1975, but officially bankrupt as declared by a federal judge.
As the Bond Buyer reports:
The case will proceed to arguments on Vallejo's motion to overturn its collective bargaining agreements, as well as negotiations with creditors on a plan to adjust its debts. Vallejo has $53 million of variable-rate debt outstanding at the time of the filing. It has since paid down $7 million, using unspent proceeds.
The unions representing Vallejo police, firefighters and other workers have offered $10 million in concessions in lieu of reopening their contracts. The judge rejected the plan, saying:
Given that the labor costs are a majority of the city's general fund expenditures, it is clear from the evidence that achieving solvency will require, among other things, serious consideration of economic concessions from the city's labor groups.
What caused Vallejo to file for bankruptcy?
Columnist George Will reports from Vallejo:
Mayor Osby Davis, who has lived in this waterfront city across San Pablo Bay from San Francisco for 60 of his 62 years, says: "If you have a can that's leaking two ounces a minute and you put an ounce a minute in it, it's going to get empty." He is describing his city's coffers.
Simply put, the city's promises exceeded its cash flow. According to Will, City Council members, who were elected with the help of union campaign contributions, approved overly generous salaries and benefits.
So a police captain receives $306,000 a year in pay and benefits, a lieutenant receives $247,644, and the average for firefighters-- 21 of them earn more than $200,000, including overtime --is $171,000. Police and firefighters can store up unused vacation and leave time over their careers and walk away, as one of the more than 20 who recently retired did, with a $370,000 check....And after just five years, all police and firefighters are guaranteed lifetime health benefits.
Will describes Vallejo as "an ominous portent for other cities, and some states, few of which are accumulating financial resources sufficient to fulfill pension promises they have made to employees."
The city of Vallejo posts information about the bankruptcy proceedings on its website.
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