A small number of cities and counties that are sinking under massive budget deficits are beginning to creep closer and closer to the “last resort” to get out from under their growing debts.

Some have filed, or are considering filing, for Chapter 9 Bankruptcy protection. It’s important to note, just a handful out of the thousands of agencies in California are falling to this level.

Cities across the state are working diligently to slash tens of millions of dollars from operating budgets, stemming largely from a reduction in sales and property tax revenues that reached extraordinary highs during the housing boom.

In some cases, budget deficits have ballooned due to a public agency’s contractual obligations to employee unions that were negotiated during better times, and call for above-average pay scales and benefit payouts.

Worker furloughs, pay cuts, layoffs and a reduction of services are the result. In some cases – like for the City of Vallejo in 2008 – bankruptcy was the only way out.

“I’ve turned over every rock I could find,” Vallejo Mayor Osby Davis told the Bond Buyer, a financial publication. “We don’t have the ability to pay our debts as they come due.”

Vallejo is not alone in its shrinking revenue base. Other cities, especially those that have been hit hardest by foreclosures, are deep in debt with few budget-cutting options.

The City of Stockton is carrying a $30 million budget deficit, and has begun researching the option of Chapter 9 bankruptcy protection.
Officials in Stockton are shying away from bankruptcy, but that it has gotten any traction is significant because cities are advised at every level to avoid it.

In opposition to an Assembly Bill requiring state permission for a city to file for bankruptcy, The League of California Cities wrote “Municipal bankruptcy is not an attractive alternative for local communities, nor is it an easy process. It is difficult, and certainly not popular with local voters – the ultimate decision-makers at the local level.”

A League spokeswoman did return a media request to PublicCEO.com, but refused to comment further regarding bankruptcy.

According to bankruptcy code, filing for bankruptcy is basically an admission by a city that it can no longer pay its bills. Doing so badly damages a city’s bond rating and its ability to take on future debt.

Filing is also costly. Vallejo has spent nearly $3 million in legal fees after being sued by public safety unions, and groups that have petitioned against the city’s filing. The suits are still pending, the costs for Vallejo still growing.

The advantage of bankruptcy is that it allows the municipalities to climb out from under union contracts.

That is the largest benefit for Vallejo whose critics have long said has overpaid its employees.

The average firefighter in Vallejo was being paid $170,000 in total compensation, according to city records. Its city manager Joe Tanner was compensated to the tune of $400,000 annually which placed him among the highest paid in the state.

In 2007, auditor-controller Jon Oiler declared the city was spending 77 percent of its general fund on police and firefighters, and more than $11 million a year more than cities similar to Vallejo.

“The comparison cities’ per capita expenditures on police and fire services as a percentage of per capita are all substantially lower: Alameda 66 percent; Berkeley 48 percent; Daly City, 54 percent; Fairfield, 52 percent; Fremont, 58 percent; Hayward, 65 percent; Mountain View, 42 percent; Palo Alto, 34 percent … ,” Oiler stated.

Although the most recent, Vallejo isn’t the first public entity to file for bankruptcy protection, and Stockton isn’t alone its flirtation with the subject.

According to information compiled by National Public Radio, in 1994, Orange County filed for Chapter 9 protection after a series of investments went south. In 2000 the state of New Jersey took over the large city of Camden which was too deep in debt to operate on its own.