Courtesy of Mish.
When Vallejo entered bankruptcy, it had a golden opportunity to shed pension obligations. When the city failed to do so, I made an easy prediction: Within years, Vallejo would be back in bankruptcy court.
And here we go again: Two years after bankruptcy, California city again mired in pension debt.
Less than two years after exiting bankruptcy, the city of Vallejo, California, is again facing a budget crisis as soaring pension costs, which were left untouched in the bankruptcy reorganization, eat up an ever-growing share of tax revenues.
Vallejo’s plight, so soon after bankruptcy, is an object lesson for three U.S. cities going through that process today – Detroit, Stockton and San Bernardino, California – because it shows the importance of dealing with pension obligations as part of a financial restructuring, experts say.
The Vallejo experience may be particularly relevant to Stockton, which is further along in its bankruptcy case than Detroit and San Bernardino and has signaled its intention to leave pension payments intact.
“Any municipal bankruptcy that doesn’t restructure pension obligations is going to be a failure because pension obligations are the largest debt a city has,” said Karol Denniston, a municipal bankruptcy attorney in San Francisco.
“A city like Vallejo can be reasonably managed but it is still going to be flooded out because it cannot be expected to keep up with its pension obligations.”
Vallejo, a port city of 115,000 near San Francisco that was staggered by the closure of a local naval base and the housing market meltdown, filed for Chapter 9 bankruptcy protection in 2008 with an $18 million deficit.
During its three-and-half year bankruptcy, the city slashed costs, including police and firefighter numbers, retiree health benefits, payments to bondholders and other city services.
The only major expense the city did not touch was its payments to the $260 billion California Public Employees Retirement System.
“We realized we did not have the time or the money to take on a giant behemoth like Calpers,” said Stephanie Gomes, Vallejo’s vice mayor.
When it exited bankruptcy at the beginning of 2011, the payments to Calpers were just over $11 million, or 14 percent of the fund. The latest budget pegs those payments at $15 million, or 18 percent of the general fund….
