When a city goes bankrupt:Vallejo case study

Businessman falls on a negative statistic. Concept of crisis and problem

This blog post is from a guest poster Sherry D. I did give some input into the post. 

When a city goes bankrupt: Vallejo case study

El Cerrito is struggling with budget deficits and sluggish revenues and risks bankruptcy unless the council takes decisive action. Bankruptcy is a means by which businesses restructure their organization to pay-off debt. So what happens?  

In a 2012 interview with Phil Batchelor, Vallejo City Manager at that time, he described the 2008 implosion of the city budget and subsequent outcomes. 

I encourage people to listen to the 16-minute segment and review the summary below.

How did Vallejo get into the situation?

Vallejo declared bankruptcy in 2008 when cities across the nation were hurting due to the economic crash at that time. But the problem in Vallejo can be traced back a decade.

  • The unemployment rate was soaring up to 15%. Businesses were having a hard time. High unemployment reduced the value of the housing stock. 
  • The state abolished the Redevelopment Agencies, taking back money. 
  • The City Council abdicated responsibility. They set salary formulas based on what other cities paid, not what they could afford, and entered into long-term contracts and MOU’s with employees. 
  •  Negotiations were not based on trust and no one wanted to say NO. Neither the politicians nor the Unions. The pension costs were not sustainable. 

What happened when the City declared bankruptcy?

When you declare bankruptcy you don’t get a free pass. You are obligated to balance the budget, pay legal bills, and address pensions. You also have to pay off bonds. 

Bankruptcy forces all parties to the table including employees and retirees.  

Bankruptcy brings a third party to preside over the negotiations – a judge.   

In the case of Vallejo, declaring bankruptcy resulted in the following changes: 

  • Closed 3 out of 8 fire stations
  • Cut fire staffing by 42 percent
  • Police reduced from 155 down to 90 officers which was a 47 percent cut. Police still had to provide service. but they have fewer assets to do it with
  • Maintenance was deferred. This results in roads and equipment deteriorating. 
  • Current employees face salary cuts, lay-offs, and find themselves having to do more work with less pay. Morale suffers. 

How did Vallejo Recover?

After a few years, with the addition of a new City Council and City Manager, the government gained the confidence of the residents. The officials earned the trust of the residents and were able to pass a tax measure. They raised 10 million dollars a year for 10 years and then restored some of the public safety personnel. Although the city of Vallejo is now facing revenue loss due to COVID, they were able to build a reserve budget to address the present crisis. 

Similarities between Vallejo and El Cerrito

  • Both have a City Manager form of government and 5 council members (Vallejo also has a Mayor and Vice-Mayor)
  • Both abdicated responsibility for a decade. In 2008 El Cerrito didn’t make the necessary cuts and used up the reserve that we need today. 
  • Both cities repeatedly overestimated revenues for consecutive years, with little scrutiny about budget assumptions. 
  • Both have high pensions costs that are not sustainable
  • Both have strong Fire and Police Unions. Even with the City on the brink of insolvency, the El Cerrito Police Union is scheduled to receive a COLA on January 1, 2021

No one would argue that bankruptcy caused a lot of harm in Vallejo. And while they left bankruptcy court a few years later they are again going to have to make some serious spending decisions. Paraphrasing the Vallejo City Manager from the narrative of the FY2020-21 adopted budget, the future does not look rosy due to pension and healthcare costs. Without addressing this issue, Vallejo may slip back after much hard fiscal restraint. 

So what does El Cerrito need to do to avoid bankruptcy? The State Auditor just issued their report on West Covina. Their criticisms of that city parallel many of our criticisms.

  1. Budgets need to be balanced and need to end with a positive balance. The last budget ended at an estimated 2 million dollar deficit. That is not a balanced budget.
  2. Public safety is half the city’s budget and those contracts need to be renegotiated by someone who is not their boss or friend. 
  3. We need long-term fiscal planning. There should be an active 5-year budget.
  4. We need to not get a loan every year to survive and paying that loan off needs to be a priority.
  5. We need to generate real Economic Development to create a tax base to establish a substantial reserve. If we had a reserve we wouldn’t need the loan. 
  6. We need a staff person capable of accurate fiscal forecasting. Someone who can articulate what assumptions were made and why they were made. Someone who can be nimble in responding to the many changes in the economy that are occurring. 
  7. We need a city manager that can remain impartial and negotiate contracts that may not be popular but be fiscally prudent.

If the City Council does not have the political will to face-off with the City Manager and the Public Safety Unions, we may find ourselves in court. With a decade of neglectful watch over the budget, successive City Managers who have been more inclined to seek out new taxes, take home relatively high compensation, and add new positions while reserves shrunk, someone, needs to be the “adult in the room”.

Moving forward, how will the city keep us from insolvency? Will the city staff provide accurate projections for budget planning? Will the City Council members question and act on faulty assertions? As residents, we can hold our City Council officials accountable. Will City Council members hold the City Manager accountable. Will residents hold the city council accountable? We have two new City Council members but three existing members who have been on the Council for many years. Can they change direction? Can they see the structural issues that make this budget unsustainable for the long-term and make decisions today that will help us in the future? Will they make decisions for the short-term that will doom us now and in the future? We don’t have to abdicate our responsibility. We need to stay on top of the meeting agendas, follow the Financial Advisory Board, be ready to ask questions, make comments, and share information with other residents. We vote in our Council members and we can vote them out.  

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