Dec. 1 (Bloomberg) -- The city council of Vallejo, California, approved a five-year plan to exit the state’s largest municipal bankruptcy since Orange County sought court protection in 1994.
Vallejo, which slashed its police and fire departments by more than 40 percent after running out of money, aims to pay down $195 million in unfunded pension obligations, trim retiree health-care premiums, curb benefits for new workers and create a reserve fund. The budget blueprint approved unanimously yesterday will be a component of an exit plan to be presented to a U.S. bankruptcy judge.
“Is it a perfect plan? No,” council member Marti Brown said. “This is a road map. The roads on the map look like mostly tertiary roads, and we’re going to need four-wheel drive for some time. But it’s a map, and it’s more of a map than I think we’ve had in a while.”
The one-time U.S. Navy town of about 120,000 on San Francisco Bay sought protection from creditors under Chapter 9 of U.S. bankruptcy law in May 2008 after the recession eroded tax revenue and unions rejected wage cuts. Chapter 9 allows municipalities to reorganize debt rather than liquidate.
“This five-year plan looks out and says basically we will be treading water for five years,” Phil Batchelor, the interim city manager, told the council.
The plan allocates $5 million for unsecured creditor claims, which include those held by employees and retirees. About $50 million of debt is supported by the city’s general fund, its main account. Under the five-year plan, Vallejo would defer principal payments until 2013, then resume paying bond debt at about $1 million a year.
Most of the outstanding principal, about $46 million, is held by Union Bank NA, according to Susan Mayer, the city’s assistant finance director. The bank is a unit of San Francisco-based UnionBanCal Corp., part of Mitsubishi UFJ Financial Group Inc., Japan’s biggest listed bank. Bank spokeswoman Jane Yedinak didn’t immediately return a call.
“The plan doesn’t have a lot of money for general unsecured creditors, and the general unsecured creditors are owed many millions of dollars,” Marc Levinson, a lawyer with Sacramento-based Orrick, Herrington & Sutcliffe LLP who’s drafting the exit plan, said in an interview. “Every dollar that goes to pay creditors is a dollar that doesn’t go to fix a pothole or to help hire another police officer.”
Cities and towns rarely go bankrupt. Vallejo’s filing was the biggest in California since Orange County in 1994, then the largest in U.S. history. Orange County, whose population of 3 million makes it the sixth-largest county in the U.S., lost $1.7 billion from a $7.6 billion investment pool when bets on interest rates soured.
“People are hopeful that we’re taking charge of what’s been happening in Vallejo,” council member Michael Wilson, 41, said in a telephone interview before the meeting. “I would hope that over the next five years that we might be able to increase the service levels we provide to our community, especially with our police department, fire department, the money we could put into roads.”
A September 2034 bond the city issued in 2003 traded at 93 cents on the dollar Nov. 18 to yield an average 6.74 percent, according to Municipal Securities Rulemaking Board data compiled by Bloomberg.
The city expects revenue of $65.5 million next fiscal year, and $68.2 million by 2015. Spending is projected to be $66.4 million next year, rising to $67.6 million in the same period.
Vallejo shrank its police force to 90 officers this year from 155 in 2003, a decline of 42 percent that eliminated most crime-prevention programs, Batchelor said.
“The quality-of-life crimes are the things that we don’t have the manpower to deal with,” Mat Mustard, a detective and president of the Vallejo Police Officer’s Association, said in a telephone interview. “To be honest with you, that’s horrible.”
The plan calls for the city to spread out its unfunded pension costs over 30 years. It would do so by paying a higher amount than what it owes for the first three years and keeping payments for the next three decades flat.
“They did what they had to do to slice things down to an affordable level,” Jon Schotz, co-founder and chief investment officer at Saybrook Capital LLC in Santa Monica, California, who oversees more than $300 million in municipal bonds, said in a Nov. 19 telephone interview.
“Every stakeholder or everyone that has a claim or is impacted by this is going to yell, scream and stomp to try to get their way, and we’ll see how strong the city’s spine is when it comes to defending this plan,” Schotz said.
The fiscal road map will be included in a proposal the city must submit to U.S. Bankruptcy Judge Michael McManus in Sacramento by Jan. 18.
In 1996, the U.S. Navy shut down its Mare Island shipyard, the service’s oldest West Coast base, dealing a blow to the city’s economy. Home prices in Solano County, which encompasses Vallejo, fell 26 percent in the year through March 2008, and sank a further 6.8 percent from December 2008 through September 2009, according to San Diego-based market researcher DataQuick Information Systems.
Before Vallejo, the last California municipality to seek protection from creditors was Desert Hot Springs in 2001. The city, about 110 miles (177 kilometers) east of Los Angeles, went bankrupt because of a legal judgment it couldn’t pay.
The case is In re City of Vallejo, 08-26813, U.S. Bankruptcy Court, Eastern District of California (Sacramento).
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