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Bankrupt Calif. City May Be a Harbinger
Economic Decline Saps a Budget Already Stretched by Massive Payroll Costs

By Karl Vick
Washington Post Staff Writer
Sunday, October 19, 2008

VALLEJO, Calif. -- When this city of 120,000 declared bankruptcy in May, the extraordinary step appeared to arise from an extraordinary circumstance: Vallejo's payroll largess. Police captains in this blue-collar town north of San Francisco make more than $200,000. The city manager's $338,000 salary is more than that of the vice president or anyone on the Supreme Court.

"I think it's fair to say everybody's here because the wages and benefits are very good," said city Finance Director Bob Stout, with a tight smile.

But as the nation's financial system staggers and recession looms, officials across America's most populous state are nervously eyeing the other side of the equation that brought the City of Vallejo into the U.S. Bankruptcy Court for the Eastern District of California: tax revenue that sank with the economy while payroll and pension obligations continued their rise.

"Are they unique?" said Dwight Stenbakken, deputy executive director of the League of California Cities. "I think we may have some other cities that this whole economic downturn is going to test."

Stockton, in the Central Valley, is furloughing city employees. Sacramento is slashing budgets to make up a $58 million shortfall in the capital city, where state lawmakers -- who under California law can reach down to "borrow" property tax receipts from cities and counties -- only recently finished a budget billions in the red.

California was hit hardest by the crash of a housing market that, when it was hot, brought cities and counties fat transaction fees and a rare boost in property taxes. The follow-on credit crisis has only made matters worse, spreading trepidation and inhibiting the consumers whose purchases provide the sales taxes that drive many city, county and state budgets.

The scale of California's exposure to the downturn was made vivid this month when Gov. Arnold Schwarzenegger (R) wrote to U.S. Treasury Secretary Henry M. Paulson Jr. to suggest that the state might need to borrow $7 billion because of the freeze-up in credit markets. Last week, however, the state succeeded in raising $3 billion itself, with the governor himself investing $100,000 in state-backed bonds.

California's pain is unique -- for now. The Golden State has long been known for leading the way nationally.

"This is going to be a serious problem," said Max Neiman, associate director of the Public Policy Institute of California, a San Francisco think tank. "I think it just happens that it's hitting hard and fast in California because the system is set up to take a revenue stream out of the building and retail sectors. But as property values stagnate and if unemployment goes up, all of these things will broaden this problem across the country."

In Vallejo, the catastrophe was a long time coming. Nestled below sun-splashed hills overlooking San Pablo Bay, this was a Navy town until the shipyard was shuttered in 1996. The city's failure to replace that income stream was masked for a time by the boom in housing values and by disarray in City Hall -- Vallejo had six city managers in four years.

Employee unions, meanwhile, displayed impressive focus. They helped make the "City of Opportunity" the first in California to send arbitration issues to an outside party, which frequently ruled for the unions. Police and firefighters routinely won contracts so bountiful that in 1993 a panel of citizens predicted that, absent an interruption of the upward cycle of raises and benefits, Vallejo would go bankrupt in 2010.

The reckoning was bumped forward two years by the housing crash and a dip in sales taxes that accompanied the closure of a car dealership and a Wal-Mart. Fiscal 2008 found the city with no reserves and 80 percent of the general fund obligated to police and fire services.

"They should be well paid. There's a risk to the job," said Marc Garman, a local watch repairman who, seeing what was coming, started a Web site called Vallejo Is Burning. "But there comes a point where it just becomes abusive."

The salaries come with extravagant benefit packages. For every $100,000 paid in salary, the city must send $29,000 to California's public pension program. Firefighters earning any kind of degree -- literature, dietetics -- get a raise. Public safety personnel retire after 30 years with 90 percent pay. And after five years on the job, the employee has health coverage for life. So does every member of the employee's family.

"Unbelievably expensive benefit," said Stout, the finance director.

The council's May vote to seek protection under Chapter 9 of the U.S. Bankruptcy Code was unanimous.

"When lemmings are marching to the sea, there's always got to be the first one," Neiman said.

City officials agree. "We were just ahead of the game," council member Stephanie Gomes said. "With this economy going in the direction that it's been going, those reserves are going to be exhausted pretty quickly, as ours were."

While the city awaits court permission to escape the union contracts, officials made "quality of life" cuts on street repairs and other nonessential services, contributing to a tattered feeling downtown. A recent story in the local newspaper urged residents to summon police if they see someone scavenging aluminum cans from recycling bins. To Victor Villanueva, it looks as if the city is competing with its homeless for pennies.

"Vallejo's lost its luster," said Villanueva, 45, sharing a box of glazed at Vallejo Jelly Donuts with his former wife, Donna Douthat. "This city was flourishing at one point. There was a time when San Francisco gay couples started moving here."

"That's when our revenues were going up," Douthat said.

A young man walked in, looked at the prices and walked out. "All my doughnuts are still here," said owner Tony Lim, with a dispirited wave toward the display case.

Police and firefighters continue to battle the bankruptcy in court, calling Vallejo a chilling example. "Everybody's scared of what the ramifications are if a judge or a bankruptcy court were able to set aside fairly negotiated contracts because of mismanagement," said Jon Riley, vice president of the firefighter's union.

Meanwhile, 21 police officers and 22 firefighters have left. Each departure depletes city coffers further, first for hefty separation payments, then for overtime to pick up the slack.

"We're getting paid the equivalent of two firefighters, and people look and say, 'Boy, these guys are getting astronomically overpaid,' " Riley said. "We're forced to work this overtime. We had guys who had tickets to go to Hawaii. Couldn't go."

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