High Labor Costs, Housing Slump Drive Calif. City into Bankruptcy

Published July 1, 2008

Lavish pay, pensions, and other perks for city workers, combined with a housing slump, have landed Vallejo, California in bankruptcy court.

Council members unanimously approved the Chapter 9 bankruptcy filing in May after budget officers told them the city could not continue paying its bills.

Out of a budget of about $80 million, this San Francisco Bay-area city of 120,000 people has a projected $16 million deficit and unfunded pension liabilities of $135 million.

$200,000 Firefighters

Ten Vallejo firefighters last year earned more than $200,000 apiece, nearly four times Vallejo’s median family income of $56,805. That pay does not include huge pension, health insurance, and disability benefits, critics note.

“This is probably the tip of the iceberg,” said Kris Vosburgh, executive director of the California-based Howard Jarvis Taxpayers Association. “So many of these cities have over-promised pension and health care benefits to their employees. It’s not unusual [in California] for firefighters to earn more than $200,000 with overtime.”

Vosburgh said that happens because “public employee unions are all-powerful. They’ll send police or firefighters out at election time and tell people the candidate they support is tough on crime and for public safety, when they really support the candidate because he’ll do what the union wants. They get the council elected, and when they sit down at the bargaining table, they have representatives on both sides of it.”

Inflated Pensions

Pay is not the only issue. Many California cities also allow employees to accrue a pension benefit of 3 percent of their final year’s salary for each year worked. So employees who spend 30 years on the job can retire with 90 percent of their final salary.

“And it gets better” for them, said Vosburgh. “They’ll pad their final year by piling up unused vacation, sick days, overtime, and other benefits and then collecting in their final year to drive up their last salary and inflate their pension even more.”

Rising Labor Costs

JoAnn West, Vallejo’s public information officer, said pay and benefits packages to the city’s 407 workers are a big factor in the city’s problems.

“Our labor costs continue to increase,” West said. “We have been trying to find a way to meet our expenses by mediating and negotiating with labor unions to reduce labor costs. We’ve been unsuccessful with both [approaches].”

The city had tried to persuade its police, firefighter, and electrical workers unions to grant contract concessions through 2012. Now it will be up to a bankruptcy court to decide how those contracts should look.

Forced Negotiations

“Chapter 9 will allow us to go in under the umbrella of bankruptcy and negotiate with labor unions and bankers regarding the terms of agreements with them,” West said. “The goal is to negotiate long-term plans.”

West said the city will be out of money by June 30. In addition to continually rising labor costs, the city also faces temporary revenue declines, mainly because of the area’s falling property values and slowing economy. West said property and sales tax revenues are both down from last year.

About 30 city residents, including city employees, addressed the council during a five-hour meeting that culminated in the decision to seek bankruptcy protection. Most agreed the city had no choice but to file for bankruptcy, though some city workers said they doubt the city’s numbers.

Skeptical Union Rep

John Riley, president of the International Association of Firefighters, called for an independent state audit of the city’s finances.

But council members agreed the city’s finances are so shaky bankruptcy has become the only option.

Councilwoman Stephanie Gomes told residents, “I want to make sure the City Council is in charge of this city and not those who comprise 80 percent of our general fund,” referring to employees whose wages and benefits consume almost 80 percent of the city’s spending.

Steve Stanek ([email protected]) is a research fellow at The Heartland Institute and managing editor of Budget & Tax News.