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February 23rd, 2012 - 10:26 pm

In December of last year, RecordNet asked whether union pensions would ultimately drive the city of Stockton, California, into bankruptcy. They were not optimistic:

If the union prevails, the city would be legally obligated to pay its members’ back pay. That would be — estimates vary — $9.1 million to $10 million.

Such a ruling would be bad news for the city. The city has only $1 million in reserves. It is struggling to pay off giant debts. Costs such as retiree medical are rising.

Furthermore, city finance experts fear the city has not hit bottom: property values will continue to decline, they believe; so will property tax revenues. The city will face deficits in the coming year.

This week CBS Sacramento reported that Stockton was considering precisely that:

The possibility of filing for Chapter 9 bankruptcy protection. If it happens, Stockton would be the largest California city to go bankrupt.

It would follow in the footsteps of Vallejo, California, which was itself “the largest city to declare bankruptcy when it did so in 2008.”

Vallejo emerged from bankruptcy in mid-2011 by cutting costs and raising revenue:

Among other changes, city staffers now contribute more to their health insurance, new firefighters have lower pension plans, and the fire department no longer has minimum staffing requirements.

The city has also taken steps to find more revenue. It’s created a one-stop permit center for developers and is asking for a 1-cent sales-tax increase and medical marijuana tax on the Nov. 8 ballot.

The moves have paid off. Toys R Us is opening a new store, and Blu Homes, a pre-fabricated home manufacturer, is opening a plant on Mare Island, according to Assistant City Manager Craig Whittom.

The fire and police unions unsuccessfully sued to stop the bankruptcy, saying the city had ample funds and was merely trying to dodge its contract obligations.

Bankruptcy is a maneuver that the Stockton unions are now trying to block. Indeed, they have to apply for state permission to do so. The Sacramento Bee writes:

Last year, the Legislature decreed in Assembly Bill 506 that local governments could file bankruptcy only after either declaring a fiscal emergency or participating in a “neutral evaluation process.”

It was a modified version of legislation that public employees unions had sponsored to require local governments to gain state permission before filing bankruptcy, stemming from Vallejo’s insolvency.

Vallejo itself is emerging from the process scarred and with many issues unresolved. The Wall Street Journal describes Vallejo in the aftermath of bankruptcy, a city where the volunteer neighborhood watches had to stand in for the missing police and fire department regulars:

With the Vallejo police force cut back, the Kentucky Street Watch Owls, one of about 350 local neighborhood watch groups, has stepped up to confront pimps and hookers in the St. Vincent’s Hill neighborhood near downtown Vallejo. A surge in prostitution in this area began during the bankruptcy proceeding, according to residents and city officials. … The city’s police force operates at 38% of its peak capacity in 2004, and the fire department is at 30%.

The Owls, which ABC News noted was locally called the “Ho Patrol,” consisted largely of women, equipped with “fluorescent vests, cell phones and note pads, [who would snap] photos and write down descriptions of people they suspect[d] to be johns, hookers and pimps,” basically raining on their parade. But the Owls can’t hang up their vests and cell phones just yet. Vallejo emerged from bankruptcy with the largest issue unresolved: the fate of its pension obligations. Unless the unions give ground, Vallejo could fall back into even more dire straits:

Three union contracts — with the police, fire department employees and administrative workers — expire this year. Vallejo must win large concessions to stay on track with a five-year bankruptcy-exit strategy, which was approved in federal bankruptcy court so that Vallejo could emerge from the proceeding in August.

In particular, Vallejo must tackle pension payouts, which it didn’t deal with during bankruptcy. The pension payouts are set to rise from roughly $13 million in the current fiscal year to about $14 million in fiscal 2013, according to bankruptcy-court filings.

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