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Tuesday, February 19, 2008

California City Nears Bankruptcy

by Calculated Risk on 2/19/2008 09:30:00 PM

From NBC: Vallejo On Brink Of Bankruptcy (hat tip energyecon)

... Vallejo may run out of cash as early as March, council member Stephanie Gomes said.

"Not only that, but now we have 20 police and fire employees retiring because they are afraid of not getting their payouts," Gomes said. "That means we have another few million dollars in payouts that we had not expected. So the situation is quite dire."
"Based upon the updated financial projections, the current estimate for insolvency is late April 2008," [City Manager Joseph Tanner] said. "It may become necessary for staff to recommend that the City Council consider filing and pursuing Chapter 9 bankruptcy in the event the city is unable to meet its existing obligations with its existing revenues," Tanner said in the report.

The city currently has a $135 million liability for the present value of retiree benefits already earned by active and retired employees and an additional $6 million a year as employees continue to vest and earn this future benefit, Tanner said.
Vallejo is in the Bay Area and has a population of about 120,000 people. This is an interesting story for several reasons - the weak economy is pushing an already untenable budget situation towards the abyss, the excessive future retirement benefits is a common story for many municipalities, and there is the issue of a city possibly defaulting on their bonds, adding to the muni bond crisis.

My guess is the city will avoid bankruptcy, but they will have to implement some serious budget cuts. And of course local government layoffs will further weaken the California economy.