Back in February 2008, Vallejo, California, was in desperate shape. Councilwoman Stephanie Gomes saw what was coming: “Our financial situation is getting worse every single day. No [one] wants to declare bankruptcy, but if you’re facing insolvency, you have no choice,” she said at the time. Two months later her council voted 7-0 to declare Chapter 9 bankruptcy. In that two month period the city’s budget shortfall ballooned from $9 million to $15 million despite cuts to museums, libraries, senior centers, and other publicly supported services like road repair. Now, according to Moody's Investors Service, the city is on the verge of its second bankruptcy.
A close look at the city’s finances at the time indicated what the city council was up against: With a budget of just $80 million, it owed $53 million to bondholders and another $220 million in unfunded liabilities for the city’s generous health benefit and retirement plans for its police officers, firemen, and other city workers.
And what of those pension plan beneficiaries? Never before had a judge ruled that labor contracts can be broken in a Chapter 9 bankruptcy until U.S. Bankruptcy Judge Michael McManus ruled in March 2009 that Vallejo could do so. Following that ruling two unions agreed to renegotiate. Two others didn’t. CalPERS [the California Public Employees’ Retirement System], the custodian of funds for those two plans, said it would not negotiate because California state law makes it a part of the state and therefore it cannot be forced to negotiate, regardless of McManus’ ruling. Said Gomes: “We realized we did not have the time or the money to take on a giant behemoth like CalPERS.”
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