Once rare, turning to bankruptcy has become a painful but enticing option for cities whose labor costs and municipal debt far outpace anemic tax revenues. The Bay Area city of Vallejo began the current trend in May 2008, filing for Chapter 9 bankruptcy protection because, city leaders said, salaries and benefits for its public safety workers were eating up too much of the general fund.
Last month, Stockton became the largest city in the state to seek bankruptcy protection after it was unable to come to agreement with its employee unions and creditors on a plan to close a $26-million gap in its general fund. On July 2, the tiny resort town of Mammoth Lakes filed bankruptcy papers in part because it was saddled with a $43-million court judgment it couldn’t pay.
San Bernardino couldn’t close a $45.8-million budget shortfall and would be unable make its payroll this summer. Days before Tuesday’s City Council vote, the city of 211,00 people had just $150,000 in the bank. The city barely scraped together enough money to cover its June payroll.
Rising pension costs are are a growing issue in many places but not the only concern in this situation. Both states and the federal government have less money to contribute for local services and budgets. Tax revenues, property and sales taxes, are at least not growing much if not down. Residents and employees make it difficult to reduce service levels. How many people will be willing to live in certain suburbs and cities if the service levels have to decrease?
It will be interesting to watch these communities that have declared bankruptcy. The current mayor of Vallejo, California suggests the move wasn’t necessarily good for the community:
The Bay Area city of 112,000 was forced to shut down two of its fire stations and today fixes just 10% of its crumbling roads. Its workforce, including police and firefighters, is about half its pre-bankruptcy size and those people left are “insanely” overworked.
Meanwhile, Vallejo spent $10 million on legal fees. It ended up with employee contracts that Osby thinks the city could have struck more cheaply if it had stayed out of bankruptcy court and turned to the bargaining table.
But perhaps bankruptcy is the only route that “successfully” convinces everyone that something needs to change…