We’re Bankrupt….Now What?

Source: Charles D. Sakai and Genevieve Ng, California Public Employee Relations, no. 199, May 2010
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In May 2008, the City of Vallejo took the bold and controversial step of fling for protection under chapter 9 of the United States Bankruptcy Code. The charter city, located about forty-five miles northeast of San Francisco, had faced years of increasing general fund costs and decreasing revenues. For several years running, Vallejo’s budget “suffered multi-million dollar deficits,” and by the end of the 2007-08 fiscal year, its “reserves were exhausted.” The general fund deficit hovered at around $17 million at the end of the 2007-08 fiscal year only to grow to $22 million in the second quarter of the next fiscal year.

Coupled with soaring labor costs — nearly 85 percent of its general-fund budget — sales tax, real property taxes, and other fees and taxes fell, producing a projected $10 million budget deficit in fiscal year 2008-09. Unable to borrow from its restricted funds and unable to access private credit markets because of insufficient cash-flow, the city was technically insolvent (i.e., it would be unable to pay its general fund obligations in the coming fiscal year). With its May 23, 2008, declaration of bankruptcy, Vallejo became the most-populated U.S. city to file for chapter 9 protection. As Vallejo prepares to emerge from bankruptcy, its experience can provide lessons for other public agencies facing difficult fiscal shortfalls. This article examines municipal bankruptcy using the City of Vallejo as an illustrative case-study regarding the interplay between the federal Bankruptcy Code and state law, including the Meyers-Milias-Brown Act.

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