Bay City News Service

Downtown Vallejo

Vallejo, which delivered a wake-up call to municipalities around the country when it filed for bankruptcy protection in 2008, outlined in court papers last week how it plans to get back on its feet, financially speaking. For residents, the plan makes for grim reading. And if you’re a public official or taxpayer who’s hoping that bankruptcy might be a way to solve your city’s financial problems, it will surely prompt you to think twice.

People think of bankruptcy as a way to wipe the slate clean of old obligations, but that’s only half true. Yes, it’s sometimes possible for businesses, individuals and governments to eliminate some — even most — debts through bankruptcy. But as Vallejo’s case underscores, the real point of bankruptcy isn’t to let a debtor walk away but rather to force a negotiation between debtors and creditors.

Those negotiations, and the litigation that often goes with them, are now mostly concluded in the Vallejo case, and the city hopes that the formal restructuring plan it just submitted will let it emerge from bankruptcy by summer.

Municipal bankruptcy — and, as The New York Times reported on Friday, a Republican-led effort in Washington to allow states to file some kind of bankruptcy — is increasingly on politicians’ radar as a way to break what are perceived as sweetheart contracts with public employee unions and cancel sometimes-lavish pension deals.

But Chapter 9 of the bankruptcy code, which covers municipal bankruptcy, is rarely used, and it’s not entirely clear what it does and doesn’t allow. (Many states don’t even allow municipalities to file.)

In Vallejo, the four unions representing city employees claimed that California law protected their contracts, but the bankruptcy court ultimately ruled that the city could cancel its collective bargaining agreements. That, in turn, forced the unions to agree to deals that they would not have accepted otherwise.

The city has cut retiree health benefits from $1,500 to $300 a month and stopped making payouts on accrued leave time.

But pension plans for retirees and current city employees, including one that allows police officers to retire at 50 with as much as 90 percent of their pay, remain untouched. The city chose not to test whether messing with pensions would be allowed even in bankruptcy, and so remains on the hook for some $195 million in unfinanced pension liabilities.

Meanwhile, much of the savings in the renegotiated union contracts come from severe work-force reductions: the police department is down to 90 sworn officers from 155 in 2003, and the fire department was slashed from 122 people and 8 firehouses to 70 people and 5 firehouses.

When voters complain about bloated government payrolls, I’d wager that taking an ax to the police and fire departments is not the solution they have in mind.

Now consider the debt currently on Vallejo’s books. The bulk is owed by special districts, mainly the water authority, and is unaffected by the bankruptcy case. Only about $50 million in city obligations, mainly lease payments on buildings, will actually be restructured, with a net “present value” savings of around 40 percent.

Meanwhile, even a cursory look at the city’s finances makes it clear that a huge part of the problem has nothing to do with payrolls or pensions or bond debt. Rather, it has to do with revenue: city tax collections plummeted from $83 million in 2007-08 to $65 million in the most recent fiscal year, a result of the recession and the housing bust. Housing values have fallen an astonishing 67 percent.

So Vallejo stumbles forward: with minimal public safety services, a skeleton crew for road repairs, deferred maintenance on everything, and no money for “extras” like parks, libraries and senior centers. That will change only when — if? — revenues begin to climb.

Assuming the bankruptcy plan is approved, the city will have saved some money and shed some long-term obligations. But when you consider the $8 million and counting in legal fees, three years of angry litigation and uncertainty, the millions that contractors, city employees and retirees will lose (they stand to collect only 5 to 20 cents on the dollar for their claims), and the hit to the city’s reputation that will likely impair business growth (and tax collections) for years, it hardly looks like a victory.

Thinking about bankruptcy as a solution to your city’s financial troubles? There has to be a better way.

This article also appears in the Bay Area edition of The New York Times.