Local governments sweat; markets in free-fall; More cities on the brink of fiscal void
By Robert Lewis
November 21, 2008
When the city of Vallejo filed for bankruptcy protection in May, the logical question was: Is this a sign of things to come?
Now two more California cities -- Rio Vista and Isleton -- are considering bankruptcy protection as an op-tion as they face large budget shortfalls and staggering debt.
While experts caution against ringing the alarm bells just yet, they do say tough economic times could push municipalities already on the brink over the edge.
"I think it's quite possible municipal bankruptcies could become somewhat more common but will still be very rare," said Jason Dickerson, budget and policy analyst at the state's Legislative Analyst's Office. "There are more municipalities that will look at what it means."
Cities, counties and other governing bodies across the state are reeling as budget projections many considered to be conservative at the start of the fiscal year, July 1, are proving to be wildly optimistic as the housing slump is affecting property tax revenue and sales tax receipts are well below last year.
Many municipalities not only are looking ahead to cuts next year but also are actively trimming expendi-tures to fix shortfalls in the current fiscal year's budget.
"California cities are like the rest of the country and rest of the state, really struggling right now," said Eva Spiegel, spokeswoman for the League of California Cities.
Rio Vista is facing an $816,000 deficit in its general fund budget for the current fiscal year and a $1.6 million deficit in its sewer fund, said Hector De La Rosa, the city manager. While officials and the City Council are looking at other cuts and ways to save money -- hiring freezes, work furloughs and increased fees, among others -- bankruptcy protection is an option.
"There are some benefits to Chapter 9 bankruptcy," De La Rosa said. "It holds off creditors until the city has time to get a plan in place."
On Wednesday, Isleton's city manager said if his city couldn't borrow $1 million by Jan. 1 to pay off $950,000 in years of accrued debt, he would urge the City Council to seek bankruptcy protection.
If both cities file a bankruptcy action, they would become just the third and fourth cities in California to do so since 1980. Vallejo filed for bankruptcy protection in May.
The best way to get out of bankruptcy protection -- or avoid it in the first place -- is to cut expenditures and raise revenue, said Marc Levinson, lead bankruptcy attorney at the firm representing Vallejo.
"It's not rocket science," he said.
The problem is municipalities have little control over the markets, voters don't want to raise taxes, and large expenditures -- pension obligations, health care costs and collective bargaining agreements -- limit a city's options, he said.
"I'm surprised not every city is discussing (bankruptcy)," Levinson said. "It's absolutely horrible out there."
That doesn't mean the state will suddenly see a spike in municipal bankruptcies, said Bob Leland, Fair-field's director of finances.
That city is expecting a $5 million to $6 million budget shortfall next year. But like most municipalities, Fairfield should be able to fix its budget with cuts and reserve funds.
Cities that do opt for bankruptcy filings "often have issues that are so unique you can't really extrapolate," Leland said.
Vallejo spent an inordinate amount of its budget on public safety salaries and benefits; Isleton has had years of debt that added up; and Rio Vista has had problems with its sewer system for decades.
While Vallejo's bankruptcy filing could encourage other cities to at least consider filing bankruptcy as an option, such a move still carries a stigma, said Dickerson, the budget analyst.
"Bankruptcy is a really big deal," he said. "It's a mark of shame."
It also means a municipality might have trouble borrowing money in the future as wary lenders worry about getting repaid, Dickerson said.
Keenly aware of the drawbacks to filing for bankruptcy protection, Rio Vista officials are looking at all other options, but times are tough, said De La Rosa, the city manager.
"A lot of municipalities are going through the same situation Rio Vista is going through," he said. "For those communities that do not have healthy reserves, they will look at all options."
Call The Bee's Robert Lewis, (916) 321-1061.
