Vallejo Bankruptcy Over: City Emerges From Three Years Of Fiscal Nightmare

Struggling East Bay Town Finally Recovers From Bankruptcy Nightmare

After spending three years as one of the highest-profile municipalities in the nation to go bankrupt, the Northern California city of Vallejo has emerged back into the world of fiscal solvency.

In August, U.S. Bankruptcy Judge Michael McManus approved the city's plan to remove itself from Chapter 9 bankruptcy and, this week, that decision finally became a reality.

"It's a culmination of a lot of hard work, tough decisions and a lot of courage for the council to do what had to be done, and now it's come out," Vallejo mayor Osby Davis told the Vallejo Times-Herald. "Everyday citizens—they don't have to be characterized as 'your city's in bankruptcy.' We've gone through that. We have been successful doing what we need to do to establish a stable financial base for our city."

The Solano County city filed for bankruptcy in 2008 in the face of an enormous deficit and lackluster revenue projections.

Bankruptcy has definitely taken its toll on Vallejo. Capital Public Radio reports:

The city of 120,00 has closed fire stations and cut funding to senior centers, libraries and public works to save money, and worked to find new sources of revenue.

The move has both advantages and disadvantages for the city that briefly served as California's capital during the 1850s. On one hand, realtors selling property in the area will no longer be legally required to notify prospective buyers that the municipality is in bankruptcy; however, the city government will once again be on the hook for its substantial debts, which totaled around $225 million at the beginning of this year.

That number will inevitably decrease, as the terms of the bankruptcy will see some creditors only getting back as little as five percent of the full amount they are owed by the city.

In an article on the state of California's legendary fiscal troubles, Vanity Fair scribe Michael Lewis pins the blame for the city's economic woes squarely on public sector pensions. "Eighty percent of the city's budget—and the lion's share of the claims that had thrown it into bankruptcy," wrote Lewis, "were wrapped up in the pay and benefits of public-safety workers."

Declaring bankruptcy gave the city protection from creditors and allowed it to renegotiate its employee contracts.

Among other changes, city staffers now contribute more to their health insurance, new firefighters have lower pension plans, and the fire department no longer has minimum staffing requirements.

The most recent major municipal bankruptcy in the state occurred in the mid-1990s when Orange County lost millions of dollars stemming from risky investments made by the affluent Los Angeles suburb's longtime treasurer and the county's famously conservative electorate rejected tax hike to make up for the shortfall.

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