Based on a September 5, 2008 federal court ruling, the City of Vallejo, California is officially bankrupt and will now begin the process of negotiating with its creditors to adjust its debts.
In a recent interview with MuniNet Guide, (see Vallejo Bankruptcy Filing Garners Attention in Municipal Finance Circles) Attorney Jim Spiotto, a partner with Chapman and Cutler, LLP, explained that Chapter 9 of the U.S. Bankruptcy Code is “philosophically designed to give municipal entities a fresh start.” However, he says, because of the negative impact on its ability to borrow funds that might be needed for infrastructure or other public improvement projects, filing for bankruptcy is really a last resort for municipalities.
Vallejo had apparently exhausted all other options when it filed for Chapter 9 bankruptcy protection in May. Promises to pay public employee salaries and benefits wound up far exceeding the city’s budget, and landed the city in an overwhelming financial challenge.
A city press release following the Court’s decision says that it plans to provide regular services to its citizens. “The City has always been, and remains, interested in a long-term solution that is negotiated with labor associations. Our employees are our most valuable asset and, with limited resources, provide excellent service to our citizens,” says Joe Tanner, City Manager.
While among the largest municipalities to file for bankruptcy in the state of California, Vallejo was not the first. Orange County, California captured national headlines when it declared bankruptcy in 1994. Orange County’s troubles stemmed from non-prudent investment strategies that resulted in the prosecution of its County Treasurer, Robert Citron. (For more information about the Orange County bankruptcy, see When Government Fails: The Orange County Bankruptcy, available through Amazon.com.)