In Vallejo, A Municipal Bankruptcy Means Big Sacrifices For Ordinary Workers
The American real estate boom turned Vallejo, California -- previously known for little more than the freeway that runs through it -- into a hot property market in the San Francisco Bay Area. But when the home-building stopped, so did the flow of money into municipal coffers, sending the city into bankruptcy nearly three years ago.
That was merely the beginning of sustained pain for Vallejo's municipal employees. As the community adjusts to a wrenching new budgetary reality, one no longer propelled by exploding property revenues, the burden has fallen on ordinary city workers.
David de Alba, a 45-year-old mechanic who has worked for the city for eight years, typifies this process. Vallejo has slashed its budget to get its books in order, reducing its general fund payroll by more than 100 workers, or about 30 percent, since 2007. De Alba has seen his monthly pay drop by about $1,000.
Last summer, after missing mortgage payments, he went into default. In November, he filed for personal bankruptcy. Financial troubles strained his marriage, and his wife left him, taking their teenage children with her. This month, the bank foreclosed on his house. He moved out last Friday, relinquishing his home of nearly two decades. He now plans to move to a trailer park.
De Alba puts the blame for this descent squarely on the city.
"They pretty much destroyed my life," de Alba says. "They put the whole burden on the working class guy."
Like cities across the country, Vallejo has seen its revenues wither in the wake of the recession, prompting pay cuts for municipal employees. In one regard, Vallejo's experience is unusual -- municipal bankruptcy remains rare, as it brings negotiations with employees into court proceedings. But the negotiations themselves are now commonplace: As cities like Vallejo struggle to get their fiscal houses in order, they are often doing so at the expense of their middle-class workers.
Vallejo's latest plan to emerge from bankruptcy, filed this month, illustrates a stark fact about municipal finance. If bondholders -- including banks and other financial institutions -- were to take a significant hit, that could send tremors through the bond market, raising borrowing costs for cities nationwide. This is why Vallejo and other municipal governments find themselves leaning most directly on their "unsecured creditors," those with no direct claims on assets pledged against debts. In plainest talk: They are zeroing in on ordinary workers and retirees, putting wages and benefits on the line.
De Alba and hundreds of other current and former Vallejo employees say the city owes them for the pay they were denied, when two labor contracts were rejected in court. But under the latest plan, Vallejo would compensate these workers and retirees for only a fraction of their claims. The people who make the city run -- firefighters, maintenance workers, engineers and others -- would be forced to help prop up the city's finances.
It's a bitter plan, as the city readily acknowledges. But, for now, it amounts to Vallejo's only hope to get back on its feet. The city of 120,000 has been in bankruptcy proceedings since May 2008. The legal battles, which have allowed Vallejo to restructure its obligations, have cost the city nearly $10 million and have angered the unions, as workers contend that Vallejo forced concessions they otherwise wouldn't have accepted.
"It's not a happy time," says Marc Levinson, the lead bankruptcy lawyer for the city. "What do you do? The money just doesn't appear."
A onetime Navy town tucked into a northern corner of California's Bay Area, Vallejo is most often traversed at high speed, on the drive from San Francisco to Sacramento along Interstate 80. In the 1990s and early 2000s, the local economy soared on the back of the real estate boom. From 1997 to 2000, building permits for new single-family homes increased over 10-fold, according to the city's financial statements. From 2002 to 2008, property tax assessments doubled.
But after the spectacular boom came a devastating bust. Since peaking in May 2006, home prices in Vallejo have plummeted 63.3 percent, according to data provider Zillow.com. The carnage there almost makes the national crash seem tame, as home prices nationwide have fallen 31 percent since their peak, according to the Case-Shiller 20-city index.
Vallejo's coffers buckled. Property taxes -- the city's largest source of revenue -- have dropped 33 percent since their peak, as sliding home values meant Vallejo couldn't collect as much from homeowners.
"In early 2008 the city confronted the reality that it would soon be unable to pay its bills as they became due," reads Vallejo's recent legal statement, in a passage whose straightforward language draws a striking contrast to the surrounding jargon.
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First Posted: 01/31/11 08:14 AM ET Updated: 05/25/11 07:30 PM ET