Vallejo blames bankruptcy on contracts with unions

San Diego Union Tribune reports:

Across the bay from San Francisco, this old waterfront city with 120,000 residents shares some history with San Diego.

It was a Navy town when an aide to Mayor Osby Davis recalls being warned as a young girl: Don't go south of Georgia Street, where there are bars, gambling and other dens of iniquity.

But the Mare Island Naval Shipyard, founded in 1854 and builder of 500 ships, including half a dozen nuclear submarines, was shut down in 1996 during a round of military base closures.

Now the city of Vallejo, hit by the slumping housing market and the economic slowdown, says it is in deep financial trouble. It's blaming contracts with public employee unions, much like the city of San Diego.

But unlike San Diego, the Vallejo City Council voted unanimously to declare bankruptcy and ask a federal court to break its union contracts – a move that experts say could set a precedent.

An attorney in Santa Monica who worked on a previous government bankruptcy that also drew national media attention, that of Orange County, said cities and unions will watch the Vallejo case.

“Probably many cities and municipal entities have problems similar to Vallejo, if not to the same magnitude, at least of the same kind,” said Paul Glassman, who represented cities in the 1994 Orange County case resulting from faulty investments.

Vallejo said in a filing with a federal bankruptcy court last month that it has been running a small general deficit for three years, which is expected to balloon to $17 million in the fiscal year beginning July 1.

The big problem is said to be contracts with police, firefighters and other unions. General fund revenue is expected to be $77.9 million, less than the $79.4 million needed for labor contracts, not to mention other costs.

The city said it has cut 87 full-time employees, leaving a work force of about 600. Funding has been reduced for street maintenance, parks, the library, a senior center and other services and programs.

Additional cuts would threaten “the city's ability to provide even minimal levels of service to its residents and, at some point, may create significant health and safety risks,” the city said in court filings.

The city told the court that unions only agreed to enough pay cuts to get the city through this month. Then a 45-day mediation failed. Now the city says it cannot rebalance the general fund “without restructuring its labor costs.”

Davis, sitting at a desk in front of a large city seal showing a boat and dock with the words “incorporated A.D. 1868,” said it's a “sad day” when a city cannot meet its promises and commitments.

Unfortunately, the mayor said, the bankruptcy is necessary because there is “absolutely no other way to pay our bills” in the new fiscal year without getting relief from the union contracts.

Is Vallejo, as some observers are saying, a test case for other local governments that might opt for bankruptcy to get relief from union contracts, including costly pensions and retiree health benefits?

Davis said Vallejo's situation should be cautionary in another way. He said a citizens committee reported in 1993 that if employee-benefits trends continued, they would exceed city revenue in 2010.

The mayor said the warning was ignored by the City Council and city managers. He said the projected day of reckoning arrived three years early, accelerated in part by the economic downturn.

“Municipalities that are looking at us ought to say to themselves, 'We need to start now finding a way to fix it, finding a way to negotiate with our employee unions,' and let them know we are headed on a collision path – and clear evidence of it is Vallejo,” Davis said.

A spokesman for the unions, Mat Mustard, a Vallejo police detective, said the financial problems are the result of “mismanagement” by city officials, not union demands.

Mustard said the city has for several years been shifting money from the general fund to a number of restricted special funds, such as transportation and redevelopment, to make its budget look unbalanced.

“They are not bankrupt,” Mustard said. “They are not insolvent. The city has in excess of 150 different funds.”

The average police officer will receive a base salary of $121,518 under the current contract, with pension, health coverage and other benefits pushing the total cost to $191,060, said a staff report to the City Council on May 6.

The average firefighter will receive an annual salary, excluding overtime, of $130,112, costing $193,174 with benefits. Ranking officers get much higher pay – for example, a police captain earns a salary of $231,120, and the total with benefits is $347,726.

Mustard said the salary report given to the City Council is overstated. He said his paycheck and information from colleagues tells him the average police salary is “somewhere in the neighborhood of $90,000.”

Public employee unions, with their political war chests, can contribute to the campaigns of elected officials in local government and school districts, presumably backing those who will agree to lucrative union contracts.

Davis said four of the seven members of the Vallejo City Council are said to have been elected with strong union support. He said he is not one of them.

“People expect that they will then sell their soul to the public safety unions and the public employee unions,” Davis said. “I have to say their vote (for bankruptcy) indicated they were willing to be fair and open . . . and make the decision they felt was in the best interest of the majority of this community.”

The unions and others who oppose the bankruptcy have until June 27 to file with the federal court.

Glassman, the bankruptcy attorney, said he thinks it's more difficult for a municipality than a corporation to persuade a court to accept a bankruptcy filing.

But once it is in bankruptcy, he said, the law is more favorable to a municipality than to a corporation. Glassman said bankrupt corporations such as airlines have obtained contract relief usually through negotiations.

“You can't even begin to assess this until after the bankruptcy filing has been accepted,” said Dave Hitchcock of Standard & Poor's, a Wall Street credit-rating agency.

Hitchcock said city financial crises usually involve defaulting on debt. San Diego's problem was an unfunded future pension liability, $1.37 billion, rather than an inability to pay current debts.

“We are still working through this ourselves, because municipal bankruptcies are so rare,” he said.

Hitchcock said a bankruptcy brings “negative consequences,” such as an inability to sell bonds. He doubts that Vallejo would be able to walk away from its debt without paying a price.