A federal judge ruled Friday that Vallejo is eligible for
municipal bankruptcy protection, setting the stage for a major
battle over possible dissolution of city employee union
contracts.
The decision came less than a week after the close of a
month-long court clash between the city and union attorneys.
"It's done, we won," said Vallejo bankruptcy attorney Marc
Levinson. "We expected to win and we did ... It doesn't mean
that we're out of the woods."
City insolvency challengers, including the Vallejo Police
Officers Association, International Association of Firefighters
and the International Brotherhood of Electrical Workers, had
argued that the city did not meet the legal requirements for
bankruptcy protection. U.S. Chief Judge Michael McManus soundly
rejected that contention in a 52-page ruling.
"In our view, Vallejo has a lot of work to put it's financial
house in order," said union bankruptcy attorney Dean Gloster,
echoing a later press release pointing at "years of bad
decisions by Vallejo city councils and their top managers."
With bankruptcy protection, the city may adjust its debts
without immediate reprisal from its creditors. Months of
mediated negotiations on the employee contracts, at nearly $79
million projected in 2008-2009 - resulted in police and fire
employee concessions. A three-month concession plan from city
employees, forged in an effort to stave off bankruptcy at least
until June 30, was extended when the city filed for bankruptcy
on May
Hint of a likely Chapter 9 bankruptcy filing came earlier this
year after city officials warned that the city had spent more
than it was receiving in revenue, and would run out of money
before the end of the year - without drastic steps.
The city council unanimously voted on May 6 to approve the
bankruptcy filing, in anticipation of a nearly $17 million
deficit. City officials said that unexpectedly decreased
2007-2008 fiscal year revenues and increased costs pushed the
city into bankruptcy.
"Considering the city's falling revenues, its prior years of
operating deficits and the program cuts and deferrals those
deficits have necessitated, continuing to shoulder the
contractual obligations under the existing collective bargaining
agreements ... with the unions makes projecting a realistic
balanced 2008-2009 general fund budget exceedingly difficult and
unlikely," McManus wrote in his ruling.
Three of the city's four employee unions, including its police,
fire and non-management workers, challenged the city's
insolvency. They claimed that the city could accept a short-term
union deal of pay raise cutbacks and other concessions, and loan
itself money from it's other city funds in order to avoid
bankruptcy this year. McManus stated that nearly all of the cash
and investments identified by the unions' attorneys are
restricted by law or grant language and are unavailable.
McManus said he wasn't swayed by testimony from the unions' key
and only witness, Harvey M. Rose Associates principal partner
Roger Mialocq.
Mialocq "damaged his credibility" when admitting he agreed to
assess the city's budget because he felt that the "city's
bankruptcy petition would harm his other clients," McManus
wrote.
McManus also commended testimony from Assistant City Manager
Craig Whittom and Assistant Finance Director Susan Mayer as
being "much more helpful and credible" than Mialocq's.
City officials said at the time they were only interested in
long-term solutions that would eradicate the pending deficit and
begin to rebuild the city's reserves.
On Monday, attorneys will meet in U.S. Bankruptcy Court, Eastern
District in Sacramento to set a schedule on the city's request
to reject its existing employee contracts outside of bankruptcy.
Copies of the ruling are available on-line at http://www.caeb.uscourts.gov
. Under "search site" look for City of Vallejo.
The Bond Buyer
September 9, 2008
Federal Court: Vallejo Officially Bankrupt
By Andrew Ward
SACRAMENTO - A U.S. federal court ruled late Friday that
Vallejo, Calif., is bankrupt, ending a battle over its solvency
and forcing the city and its creditors to begin negotiating a
plan to adjust the city's debts.
Vallejo, a city of 117,000 about 30 miles northeast of San
Francisco, filed for protection from creditors under Chapter 9
of the federal bankruptcy code on May 23, becoming the biggest
municipal bankruptcy since Orange County, Calif., in 1994. The
city began the current fiscal year with no reserves and a
projected $17 million deficit.
"The city was insolvent as of the date the petition was filed,"
said Michael McManus, chief judge of the U.S. Bankruptcy Court
for the Eastern District of California, in a written ruling.
"With no reserves and a multi-million dollar deficit, the
general fund would not have sufficient funds and cash flow to
pay its debts as they become due."
The ruling means that the city is officially bankrupt. The case
will proceed to arguments on Vallejo's motion to overturn its
collective bargaining agreements, as well as negotiations with
creditors on a plan to adjust its debts. Vallejo has $53 million
of variable-rate debt outstanding at the time of the filing. It
has since paid down $7 million, using unspent proceeds. The
majority of the rest is held by Union Bank of California, the
liquidity provider. The city, in its pendency plan, said it
would not pay more than 6% on that debt.
Unions for city police, firefighters, and other workers fought
the bankruptcy filing, arguing that the city understated its
resources and overstated its obligations in its bankruptcy
filing to find a way out of its labor contracts.
McManus rejected their arguments and suggested he sees little
possibility that the unions' contracts will be able to survive
the bankruptcy.
"Given that the labor costs are a majority of the city's general
fund expenditures, it is clear from the evidence that achieving
solvency will require, among other things, serious consideration
of economic concessions from the city's labor groups," McManus
said in his ruling.
The city has pushed hard to speed the bankruptcy proceedings,
calling the unions' objections a waste of time and money, but
McManus gave the unions as much time as they wanted to make
their case against the bankruptcy.
Vallejo budgeted $2 million for bankruptcy expenses for this
entire fiscal year, but it spent $1.1 million in just the first
month and a half of the proceedings, according to Joann West,
the city's public information officer.
The city workers - represented by the Vallejo Police Officers
Association, the International Association of Firefighters, and
the International Brotherhood of Electrical Workers - hired one
of California's best-known budget analysts to review the city's
books and suggest ways to return to solvency.
McManus lambasted the testimony by Harvey M. Rose Associates
principal Roger Mialocq as lacking credibility because the
budget analyst admitted that he took the case in part because he
was worried about the impact of a municipal bankruptcy on the
interest rates his other clients would have to pay.
Still, McManus said Mialocq's testimony showed that even the
unions' own consultant couldn't balance the city budget without
rejecting labor contracts. The unions had asked the judge to
consider the city's solvency in light of $10 million in
concessions they offered, not their contracts.
He refused.
"The court rejects the unions' argument that the city is not an
eligible debtor under Chapter 9 based on the existence of the
unions' offer," McManus wrote. "Insolvency is determined based
on the city's obligations as of the petition date as those
obligations actually exist, not as they could exist under
hypothetical circumstances."
The judge also rejected union suggestions that the city had
extra money outside the general fund that it could use to offset
bankruptcy, agreeing with city assistant finance director Susan
Mayer that those funds can only be tapped for short-term loans
that can be repaid within a year. That wasn't possible this year
because the city couldn't pass a balanced budget, he said.
To a large degree, the ruling returns the city and its unions to
the position they were in before the bankruptcy - facing each
other over a negotiating table. The employee unions had offered
the city a temporary $10 million salary reduction, while the
city was pushing for permanent changes in contracts, including
removal of minimum staffing requirements for its police and fire
departments.
Both sides seem to have gotten the message that it's time to
negotiate a settlement.
"We are willing to continue working with city officials to craft
a comprehensive plan that restores Vallejo's financial stability
and allows us to continue providing vital services to the people
of our community," the unions said in a statement released by
their lawyer, Dean Gloster, of Farella, Braun & Martel in San
Francisco. "We reiterate this $10 million offer."
The city also issued a statement calling for renewed
negotiations.
"While past attempts to negotiate modifications to collective
bargaining agreements to ensure long-term solvency have been
unsuccessful, the city is hopeful that the labor associations
will reengage and the parties will be able to agree on
modifications to the labor agreements that provide such
long-term solvency," Vallejo officials said in a press release.
POLICEPAY.NET
September 9, 2008
--
EDITORIAL --
Vallejo Decision Delayed For 3 Months
Vallejo Police and Fire Granted Stay of Execution
By Ron York, President
In a move that caught most people, including me, by surprise,
Bankruptcy Judge Michael McManus continued the hearing for the
City of Vallejo's motion to reject the union contracts until
December 2, 2008. The civil minutes of yesterday's hearing said
only "HEARING CONTINUED TO 12/2/08 at 09:00 AM Request of
Parties". That is all we know because nobody is talking. I was
convinced that yesterday's hearing would be a slam dunk for the
city, with union attorney Dean Gloster having to stay after
school, but I misjudged that.
A surprising thing is the lack of interest in yesterday's
proceedings by the local press and the hysterical bloggers.
Apparently, Friday's victory by the city was enough to satisfy
everyone's anger and outrage. If we had known this sooner, the
whole bankruptcy process could have been avoided. The presidents
of the police and fire unions could have been given a public
flogging in front of city hall and everyone would have went home
feeling vindicated.
First, I must admit that I am more concerned with the
ramifications of what occurs in Vallejo than with Vallejo in
particular. I do care about Vallejo. I fully understand what
Roger Mialocq meant when he had to address this same reality of
a larger interest. There is more at stake here than just the
unions in Vallejo. I do not see myself as Joan of Arc, but I
do believe that my station in life requires that I always be
mindful of public safety everywhere. The proceedings in the
Sacramento court will have an impact nationwide.
What is the effect of yesterday's action? The most important
result is that the momentum has been taken out of the freight
train that was about to run over public safety collective
bargaining. By December, it will be hard for the opposition to
regain the momentum. If you are a Vallejo police officer,
firefighter or just a supporter, stay off of those blogs and
bulletin boards - all of them. There is no such thing as a
"private blog." Quit talking about the case. If you work for the
City of Vallejo, do your job - including only using city
computers and telephones for the purpose they are intended. Joe
Tanner's right in the broad sense. To the unions, take that
horrible website down and stop making public statements. Put a
muzzle on your attorneys. Lawyers are lawyers, not public
relations spokesmen. Hire a real public spokesman. Everybody
needs to "shut up." Read that little card you have in your
pocket:
"You have the right to remain silent. Anything you say can and
will be used against you in a court of law."
To the members of the unions, you need to remove the obstacles
that stand in your way of having public support. Regardless of
what you may want to believe, "you ain't got it." The strange
relationship between the fire department and the firefighters
union reminds me of an old song about a guy who married his
grandma and became his own grandpa.
To the rest of you police officers and firefighters that are
not employees of the City of Vallejo, you had better start
developing a strategy for dealing with the Vallejo Syndrome -
now. What are you going to do when the topic of bankruptcy and
voiding your collective bargaining agreement begins being
discussed. I hope you do not start spewing venom like the
guys in Vallejo did and continue to do. You better have a
plan - one that actually has a chance of succeeding. Are you
listening Gary and Duluth?
To the national police unions: It is up to you to lead the
battle. A global strategy and operation center needs to be
established. Forget about issuing incendiary press releases that
castigate those who are not in line with your views. Stop
telling the world about how the other police unions are
horrible. Mend your fences. If you want your organization to be
the "number one" police union, take the lead on this. Other
organizations that are ambivalent about whether they are agents
of collective bargaining, primarily NAPO and PORAC, now is a
good time to make your declaration.
Police and fire have relied too long on inherent public support,
while either avoiding or fumbling public relations efforts. The
morticians have done a better job of P.R. than public safety. We
live in a rapidly changing society where almost any information
is available immediately. This has lead to a society that is
cynical and immune to gratuitous rhetoric. If your script looks
like it was written by Joseph Goebbels, you're toast.
Think about what I have said. I did not write it to make you
happy, but rather to awaken you.
The Bond Buyer
September 12, 2008
Cease-Fire in Vallejo?
City, Unions Willing to Negotiate
By Andrew Ward
VALLEJO, Calif. - Vallejo and its public employee unions say
they're willing to negotiate a settlement to end the city's
three-and-a- half-month old Chapter 9 bankruptcy case.
There are tentative signs that they might mean it.
"The city has invited us to sit down and talk," said detective
Mat Mustard, vice president of the Vallejo Police Officers
Association. "We plan to do that."
Vallejo police fought the city's bankruptcy along with the
International Brotherhood of Electrical Workers and the
International Association of Firefighters. Mustard said workers
are willing to reconsider city demands after a federal judge
ruled last week that Vallejo is bankrupt and hinted that the
unions may lose their contracts in bankruptcy.
For their part, city officials said they would still prefer to
solve the conflict before it does further damage to Vallejo's
long-term access to capital markets, and its ability to recruit
and retain workers.
"This is a more opportune time to negotiate a settlement than
there has ever been," said Mayor Osby Davis, adding that earlier
negotiations quickly degraded into arguments over solvency. "We
don't have to have that discussion anymore," he said.
The city and the unions went through many rounds of unsuccessful
negotiations before the bankruptcy. In March, they reached an
interim agreement that delayed the bankruptcy filing, but they
failed to reach a permanent agreement to reduce the city's labor
costs and avoid bankruptcy. The talks broke off entirely after
their court battle began.
The adversaries refused this week to discuss their precise
negotiating positions, and court testimony made it clear that
they disagree on some key issues. They also have to agree to
move past many months of acrimony. Union leaders and city
officials hardly even looked at each other when they met in
bankruptcy court in Sacramento.
Still, they are starting negotiations for the first time since
the bankruptcy filing, and outside bankruptcy experts - and
their own lawyers - say they have strong incentives to negotiate
a solution that will end an increasingly costly trial. Both
Vallejo and its unions face significant risks in continuing the
case.
"Bankruptcy is like 'Deal or No Deal,' " said James Spiotto, a
lawyer and municipal bankruptcy expert at Chapman and Cutler in
Chicago, who is not involved in the case. "No deal, you get the
judge to decide."
U.S. Bankruptcy Judge Michael McManus has given the city and its
workers time to talk before asking him to settle their
differences. Earlier this week, he scheduled hearings on a city
motion to reject its collective bargaining agreements. He's not
going to hear arguments on the request until December.
McManus, chief judge for the Eastern District of California in
Sacramento, gave workers a strong incentive to negotiate with
renewed realism - a decisive defeat. He not only rejected their
contention that Vallejo was feigning insolvency, he also made it
clear that workers shouldn't expect their contracts to survive a
bankruptcy proceeding and that he didn't find their star witness
credible.
"Given that the labor costs are a majority of the city's general
fund expenditures, it is clear from the evidence that achieving
solvency will require, among other things, serious consideration
of economic concessions from the city's labor groups," McManus
wrote in a 52-page ruling last Friday.
The unions have an option of appealing the ruling, but Spiotto
said the judge's ruling was "thorough" and squared with
established law on municipal bankruptcy.
Labor bankruptcy lawyer Dean Gloster, of Farella Braun & Martel
in San Francisco, said the unions haven't decided whether to
appeal.
An appeal would add to mounting legal bills on both sides of the
case. Mustard estimated the unions have spent more than $1
million. The city budgeted $2 million for bankruptcy costs for
this entire fiscal year and spent $1.1 million in just the first
month and a half of the proceedings, before the current fiscal
year even began, according to Joann West, the city's public
information officer.
That's not a trivial amount of money in a city with a general
fund budget of less than $90 million and municipal market debt
of about $47 million.
The indirect costs of bankruptcy may be higher, and they've
fallen largely on the residents of the city.
Vallejo has lost many police officers since the case began. The
working-class city sits in one of the richest regions in the
country. Nearby cities, such as San Francisco and Oakland, are
offering signing bonus to experienced Vallejo cops who will jump
ship.
"Police officers are marketable, and they're leaving," Mustard
said. He said the city has lost five officers in the week since
the ruling and the police force could shrink to 100 by the end
of the year from 140 in 2007. "Over the course of a year,
they'll lose a third of their police force," he said.
As always, the city and its unions dispute the precise figures,
but they agree that the department has fewer officers than it
needs. They also agree that crime is increasing. The police
chief told the City Council that he doesn't have enough staff to
do his job. The city has stopped investigating most property
crimes.
Even the strongest proponents of Vallejo's bankruptcy
acknowledge that there are limits to the cuts they can impose on
workers if it expects to continue to provide city services in
such a competitive labor market.
"We have to offer a fair, competitive wage," said Councilwoman
Stephanie Gomes, who was an early proponent of bankruptcy and
one of the public safety unions' toughest adversaries in local
debates, though she says public safety advocates have
exaggerated the bankruptcy's impact on crime.
"Crime is going up because the economy is weak," she said.
By anyone's estimate, Vallejo sits near the epicenter of the Bay
Area's housing crisis. The Vallejo-Fairfield metropolitan area
suffers the eighth-highest mortgage foreclosure rates in the
nation, according to RealtyTrac.
Again, it's impossible to tell how much of the real estate
market is suffering due to the bankruptcy case and how much
underlying fundamentals are causing the pain.
Bankruptcy advocates point out that the bankruptcy is an attempt
to solve the city's financial problems, which would help the
local housing market in the long term.
"Anytime you try to make profound changes, it's painful," Gomes
said.
Opponents point out that the uncertainty around future tax
rates, crime, and the level of city services can't improve the
marketability of local homes.
"I have heard a couple of anecdotal reports about people who
chose not to buy here because of the bankruptcy, but for the
most part, that doesn't appear to be the case," said Lori
Collins, a Vallejo realtor and president of the Solano County
Association of Realtors
She said she discloses the bankruptcy filing to buyers, but she
has seen volume pick up recently because "prices have come way
down here."
In the capital markets, the damage increases the longer the city
is in bankruptcy and the more damage it does to its municipal
creditors, said Spiotto, who has been working on municipal
credit defaults and bankruptcies for almost three decades.
Vallejo officials have said they want to minimize the impact of
the bankruptcy on bondholders and on Union Bank of California,
the letter-of-credit bank on $47 million of the city's $53
million of outstanding variable-rate certificates of
participation at the time of the bankruptcy filing.
The city has since repaid about $7 million of the debt by
returning unspent bond proceeds to lenders, but it has also
unilaterally capped the interest rate it will pay on its
outstanding debt at 6%. The bank rate on the bonds is indexed to
the prime rate, plus a penalty of one to three percentage
points, which increases the longer the bank holds the bonds.
Vallejo doesn't want to permanently forgo access to the funds
that will be necessary to develop the city's economy and
infrastructure.
Mayor Davis understands the damage that does to the city's
long-term prospects. He served as a legal counsel on some of
Vallejo's outstanding issues, and he wants to see it take
advantage of its ample natural assets in any turnaround.
Vallejo is working to redevelop its downtown waterfront and the
former Mare Island Naval Shipyard, which closed in 1996.
Developers are restoring historic structures and building
thousands of new homes on the island, in addition to parks,
mixed-use developments, and the Touro University, a school of
osteopathic medicine. It's the sort of project that could expand
the city's tax base over the long term.
Locals often bemoan their city's untapped potential. "The
p-word," as Gomes calls it, is easy to see in Vallejo.
The city sits just south of the Napa Valley wine country,
nestled between rolling, undeveloped hills and the San Francisco
Bay. It has rich and poor sections and below-average incomes for
the wealthy region. But its strengths include ethnic diversity,
relatively affordable housing, a charming but underutilized
downtown, and some of the best weather in the notoriously cold
and foggy Bay Area.
With three months until the next hearing, the two sides have
plenty of time to negotiate.
"It's always preferable to cut an acceptable deal and get out of
bankruptcy because it does put a stigma on them," said David
Dubrow, a lawyer at Arent Fox in New York. Dubrow, who
represented letter of credit banks in Orange County, Calif.'s
1994 bankruptcy, is not involved with the Vallejo case.
The city continues to incur damage claims that it will have to
pay to creditors for any contracts they break in bankruptcy.
While lawyers say those claims will have to be paid off in
"itty-bitty bankruptcy dollars" - that is, with a significant
haircut - Vallejo can avoid those expenses if it negotiates a
settlement that allows them to dismiss the case.
While none of those economic incentives makes a settlement
certain, the city and the unions did get a clearer view of the
each other's negotiating position in the bankruptcy hearings.
"If they can cut a good enough deal, it's in the interests of
the city to get out relatively quickly," Dubrow said. "But from
the city's point of view, they already went into bankruptcy, so
they've got to clean up their problem. You've got to hit your
bottom line or it's not worth coming out."
The unions offered the city $10.6 million in pay cuts before the
filing. In court, Vallejo officials said they couldn't take the
offer because it was temporary. Union lawyers said workers were
hesitant to offer more out of fear the city would take the
concessions and file for bankruptcy anyway, undercutting
workers' bankruptcy damage claims.
As Mustard sees it, the city wouldn't accept the union
concessions for four reasons:
=
The unions offered temporary pay cuts, not permanent ones.
=
The unions demanded contract extensions in exchange for pay
concessions.
=
The unions refused to give up minimum staffing requirements for
the police and fire departments.
=
The parties failed to agree on limits on the amount of paid
leave union leaders can take for union business.
"I don't disagree that it's the time for compromise," Mustard
said. "If they stay on those four topics, I'm optimistic that we
can come to a resolution. If they step outside of that box, I'm
unsure if we're going to be able to do anything." He suggested
the city may have bigger goals than solvency, including
rewriting work rules and revising retirement benefits.
For its part, Vallejo won't say how hard it will press its
newfound advantage. Gomes and Davis - the two officials who
agreed to talk on the record - would not say what the city's
negotiating stance would be. Its offer will be determined by the
whole City Council and won't be made in public.
Both men said they would push for a settlement that includes a
resolution of Vallejo's biggest debt, an unfunded $135 million
retiree health care liability. The city offers employees
retirement health benefits after just five years of service.
That wasn't a key issue in earlier negotiations, according to
testimony at the bankruptcy trial.
If Vallejo wants to solve that problem now, it may prevent any
quick settlement of the case. The court says the unions don't
represent the holders of retiree health claims, and it's not yet
clear who will.