December 9, 2010
Last week, the cash-strapped city of Vallejo approved a five-year plan to steer itself out of bankruptcy. But that plan has angered some of the city's more than 1,000 creditors, some of whom are now threatening to plunge the town into costly legal battles.
Some of those up in arms are Vallejo's more than 400 retirees and surviving spouses, to whom the city had guaranteed $135 million in health-care benefits. Jim Paul, an attorney for the retirees, says the city has "not negotiated with us in any sense at all, and now they are forcing this plan on the retirees." He says he intends to file a challenge to the plan.
The flap comes as Vallejo—California's largest municipal bankruptcy since Orange County filed in 1994—tries to find firmer financial footing since filing for bankruptcy protection in May 2008. Under its plan, Vallejo says it will defer any debt repayment until 2013, given that it has just $5 million to pay back unsecured creditors owed more than an estimated $50 million. The city also plans to cut health-care benefits for retirees to $300 a month, down from $1,500 a month now for some retirees.
Stephanie Gomes, a Vallejo city councilwoman, says the plan tackles some of the city's most vexing issues of employee costs and pension obligations. She adds city leaders knew there would be legal challenges to the plan but their chief concern is exiting from bankruptcy in a solid financial position.
"There are a lot of people unhappy right now, and that's unfortunate," says Ms. Gomes. "But we're insolvent. We don't have the money."
How Vallejo navigates through its challenges with creditors will be closely watched by other California cities on the verge of bankruptcy. Municipal bankruptcies can be drawn out, complicated affairs. Unlike corporate bankruptcies where judges can liquidate a business to repay creditors, bankruptcy judges have no authority to liquidate a city and can't force a town to repay debts. As a result, municipal bankruptcies can take years, while some corporate bankruptcies can be resolved in as little as a month.
"I tell all cities that say they're interested in bankruptcy to not do it," says Marc Levinson, a bankruptcy attorney representing Vallejo. "It's painful and can get very expensive. Exhaust all measures before taking this route."
Vallejo, population 120,000, filed for bankruptcy in 2008 after suffering three consecutive fiscal years of budget shortfalls, which depleted the city's cash reserves. During bankruptcy hearings that year, Vallejo fought with its police, fire and maintenance unions over whether it was insolvent and whether the bankruptcy allowed the city to overhaul contracts with the unions. In 2009, a federal bankruptcy judge sided with the city on both issues.
That allowed Vallejo leaders to reach new contract agreements with the police and fire unions in 2009 and earlier this year. Under those agreements, new employees would receive reduced pension benefits, among other cuts. The city reached similar agreements with its remaining two unions, representing administrative workers and maintenance workers.
Vallejo's finance director, Robert Stout, began crafting the five-year plan to emerge from bankruptcy, which draws heavily from a proposal put together by the city council last year. The plan prescribes tough measures, such as maintaining the city's current work force supported by the general fund budget at 312 employees, down nearly 40% from 2004. It also calls for reduced spending on infrastructure improvements.
The city also is aiming to establish a 5% cash reserve of general fund revenue, or about $3.4 million, by 2015. If all goes well, the city believes it can come out of bankruptcy as early as summer 2011.
Still, Vallejo must square off with some creditors. Those include Vallejo's retirees, Clarks Pest Control Inc. in Vacaville, which is owed $2,500, and North Bay Construction Inc. in Petaluma, which is owed $1.2 million, according to bankruptcy records.
"The city made a bunch of bad moves, and everyone else has to pay the price for it," says Ron Gardner, branch manager for Clark Pest Control. Mr. Gardner says the company is weighing its options over how to recoup payment. North Bay Construction didn't respond to requests for comment.
Another creditor is National Public Finance Guarantee Corp., which insured financing for some Vallejo construction projects and which already has taken the city to court. That's because Vallejo defaulted in 2009 on principal and interest payments owed to Wells Fargo & Co., which brokered the financing.
In August, National Public Finance, of Armonk, N.Y., filed a claim in the Eastern District of California Bankruptcy Court, alleging that it is owed about $4 million and attempting to go after vehicle-licensing fees that Vallejo pays to the state. The company says the vehicle-licensing fees were pledged to support the loan in the event of a default. A hearing in the case is scheduled for mid-January.
"We're simply asking the court to ensure that investors receive what was promised when the bonds were issued," says Kevin Brown, a spokesman for National Public Finance.
Mr. Levinson, Vallejo's bankruptcy attorney, says the city disputes the matter and that the bankruptcy judge will decide if the company's claims are valid.
Last week, the cash-strapped city of Vallejo approved a five-year plan to steer itself out of bankruptcy. But that plan has angered some of the city's more than 1,000 creditors, some of whom are now threatening to plunge the town into costly legal battles.
Some of those up in arms are Vallejo's more than 400 retirees and surviving spouses, to whom the city had guaranteed $135 million in health-care benefits. Jim Paul, an attorney for the retirees, says the city has "not negotiated with us in any sense at all, and now they are forcing this plan on the retirees." He says he intends to file a challenge to the plan.
The flap comes as Vallejo—California's largest municipal bankruptcy since Orange County filed in 1994—tries to find firmer financial footing since filing for bankruptcy protection in May 2008. Under its plan, Vallejo says it will defer any debt repayment until 2013, given that it has just $5 million to pay back unsecured creditors owed more than an estimated $50 million. The city also plans to cut health-care benefits for retirees to $300 a month, down from $1,500 a month now for some retirees.
Stephanie Gomes, a Vallejo city councilwoman, says the plan tackles some of the city's most vexing issues of employee costs and pension obligations. She adds city leaders knew there would be legal challenges to the plan but their chief concern is exiting from bankruptcy in a solid financial position.
"There are a lot of people unhappy right now, and that's unfortunate," says Ms. Gomes. "But we're insolvent. We don't have the money."
How Vallejo navigates through its challenges with creditors will be closely watched by other California cities on the verge of bankruptcy. Municipal bankruptcies can be drawn out, complicated affairs. Unlike corporate bankruptcies where judges can liquidate a business to repay creditors, bankruptcy judges have no authority to liquidate a city and can't force a town to repay debts. As a result, municipal bankruptcies can take years, while some corporate bankruptcies can be resolved in as little as a month.
"I tell all cities that say they're interested in bankruptcy to not do it," says Marc Levinson, a bankruptcy attorney representing Vallejo. "It's painful and can get very expensive. Exhaust all measures before taking this route."
Vallejo, population 120,000, filed for bankruptcy in 2008 after suffering three consecutive fiscal years of budget shortfalls, which depleted the city's cash reserves. During bankruptcy hearings that year, Vallejo fought with its police, fire and maintenance unions over whether it was insolvent and whether the bankruptcy allowed the city to overhaul contracts with the unions. In 2009, a federal bankruptcy judge sided with the city on both issues.
That allowed Vallejo leaders to reach new contract agreements with the police and fire unions in 2009 and earlier this year. Under those agreements, new employees would receive reduced pension benefits, among other cuts. The city reached similar agreements with its remaining two unions, representing administrative workers and maintenance workers.
Vallejo's finance director, Robert Stout, began crafting the five-year plan to emerge from bankruptcy, which draws heavily from a proposal put together by the city council last year. The plan prescribes tough measures, such as maintaining the city's current work force supported by the general fund budget at 312 employees, down nearly 40% from 2004. It also calls for reduced spending on infrastructure improvements.
The city also is aiming to establish a 5% cash reserve of general fund revenue, or about $3.4 million, by 2015. If all goes well, the city believes it can come out of bankruptcy as early as summer 2011.
Still, Vallejo must square off with some creditors. Those include Vallejo's retirees, Clarks Pest Control Inc. in Vacaville, which is owed $2,500, and North Bay Construction Inc. in Petaluma, which is owed $1.2 million, according to bankruptcy records.
"The city made a bunch of bad moves, and everyone else has to pay the price for it," says Ron Gardner, branch manager for Clark Pest Control. Mr. Gardner says the company is weighing its options over how to recoup payment. North Bay Construction didn't respond to requests for comment.
Another creditor is National Public Finance Guarantee Corp., which insured financing for some Vallejo construction projects and which already has taken the city to court. That's because Vallejo defaulted in 2009 on principal and interest payments owed to Wells Fargo & Co., which brokered the financing.
In August, National Public Finance, of Armonk, N.Y., filed a claim in the Eastern District of California Bankruptcy Court, alleging that it is owed about $4 million and attempting to go after vehicle-licensing fees that Vallejo pays to the state. The company says the vehicle-licensing fees were pledged to support the loan in the event of a default. A hearing in the case is scheduled for mid-January.
"We're simply asking the court to ensure that investors receive what was promised when the bonds were issued," says Kevin Brown, a spokesman for National Public Finance.
Mr. Levinson, Vallejo's bankruptcy attorney, says the city disputes the matter and that the bankruptcy judge will decide if the company's claims are valid.
Closed November 2010