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This San Francisco Bay-area city hopes to emerge from bankruptcy by late summer or early fall of next year, ending more than three years of widely watched legal insolvency that produced a landmark ruling overturning a labor contract.

A city official told a community workshop Saturday that a long-awaited plan needed to exit bankruptcy will be presented to the city council on Nov. 16 for adoption on Nov. 30, well in advance of a court-imposed Jan. 11 deadline.

Last week the city council hired a new interim city manager, Phil Batchelor, an experienced government manager described by Mayor Osby Davis as having an “excellent track record in handling turn-around situations.”

Vice Mayor Stephanie Gomes, part of a council faction that has been at odds with Davis on labor contracts and other issues, said Batchelor has no “baggage, history, alliances” and was hired with a rare unanimous council vote.

Gomes said Batchelor “is coming here to get the work done, to give us a recovery plan and to get this moving forward, and to do it within a year” She said he also is expected to help find a permanent city manager.

Batchelor told the council he will work to create “a culture that promotes civility, respect, that demands integrity.” He said he would not only work to end bankruptcy, but on aiding the “economic vitality” of a community with “wonderful resources.”

The new interim city manager, who begins work today, has a contract that pays him $25,000 a month and can be canceled with a 30-day notice, the Vallejo Times-Herald reported.

Vallejo drew national attention by declaring bankruptcy in May 2008, a move to overturn labor contracts said to be unaffordable. Topping the list of creditors were retiree health, $135 million, and the California Public Employees Retirement System, $84 million.

CalPERS hired a lawyer and opposed the overturning of labor contracts. Alarmed public employee unions backed unsuccessful legislation, AB 155, requiring cities to seek the approval of a labor-friendly commission in Sacramento before declaring bankruptcy.

Unions said during contract negotiations in some cities management threatened to “pull a Vallejo.” Officials in Los Angeles and San Diego have warned of bankruptcy if soaring pension and other labor costs are not curbed.

But now Vallejo’s lengthy struggles, with lawyer fees said to have reached $9 million, is being cited as an example of how bankruptcy is a difficult and uncertain option for troubled cities.

A recent article in The Bond Buyer said in Chapter 11 corporate bankruptcies, the courts have the power to move to Chapter 7 to liquidate the corporation, giving creditors an incentive to restructure debt quickly to avoid an even bigger loss.

But in the Chapter 9 bankruptcy of a municipality, which can’t be liquidated, all the courts can do is rule on whether the reorganization to reduce debt is fair to all of the creditors, what some call a “shared sacrifice.”

Vallejo had another problem. It was one of about 20 cities in California that have “binding arbitration” for deadlocks in labor contract negotiations. An outside arbitrator picks the offer of either management or labor, but cannot fashion a compromise.

Because arbitrators tend to pick the labor offer, management says, labor uses the prospect of binding arbitration to get leverage in contract talks. If the bankruptcy court overturned the Vallejo contracts, an attempt to negotiate new contracts could go to arbitration.

Shortly after the court approved the Vallejo bankruptcy, a split vote of the city council approved a new police contract with short-term concessions and a 7 percent pay raise beginning last July.

This year the city, still mired in bankruptcy, unsuccessfully tried to get the union to forego the pay hike. The city lacked clout. A contract approved after bankruptcy is approved cannot be overturned by the court.

The city got savings from a new contract with firefighters and a small union representing managers and others. But it was unable to reach an agreement with the International Brotherhood of Electrical Workers.

In September of last year, U.S. Bankruptcy Court Judge Michael McManus in Sacramento overturned the IBEW contract, an apparent first under Chapter 11, some experts said. The IBEW appealed.

Last June U.S. District Judge John Mendez in Sacramento upheld the McManus ruling. The IBEW appealed again and reportedly plans to pursue the issue all the way to the U.S. Supreme Court if necessary.

“The appeal, which likely will not be decided for 18 months to two years,” a city news release said in July, “will cause the City of Vallejo to expend more of its dwindling resources on attorneys rather than on city services, including public safety and other critical general fund expenditures.”

Meanwhile, all of the city council members except Michael Wilson, who lost in a state Assembly Democratic primary, backed a measure on the June ballot, approved by 51 percent of voters, that repealed Vallejo’s binding arbitration.

About 50 persons attended the workshop Saturday, the second of two held last week. Vallejo finance director, Rob Stout, gave a briefing on the bankruptcy before residents were invited to ask questions and express their views.

Stout said the city had a $12 million general fund reserve when a structural deficit, an ongoing gap between spending and revenue, emerged in fiscal 2005-06. For three years in a row, the city rejected union concessions as insufficient.

By the spring of 2008, Stout said, the reserve was gone and the city declared bankruptcy. General fund spending that was once $87 million has plunged to $64 million this fiscal year.

The city made major cuts in police and firefighter services. As some had feared and others had hoped, the city did not attempt to test whether bankruptcy can be used to reduce pension obligations to public employees.

Stout said the city’s unfunded CalPERS liability in the decades ahead soared after the stock market crash and financial crisis two years ago, going from $89 million to $233 million.

The city’s current annual pension contribution is more than required by CalPERS. The city wants to avoid annual rate shocks of $1.5 million during CalPERS’ three-year “smoothing” phase in of investment losses.

In addition, said Stout, the city avoids an added annual cost averaging $700,000 over the next three decades and is able to show the bankruptcy judge progress in dealing with pension debt.

Vallejo is making a major reduction in retiree health benefits, expected to cut the long-term unfunded debt from $104 million to $27 million. Stout said the health cut could amount to 30 to 40 percent of the total benefit package of some retirees.

The city has an estimated $50 million in claims for bills unpaid during bankruptcy, including employee pay cuts. The plan is to pay the claims at 10 cents on the dollar, a reduction that must be approved by a vote of the creditors.

Stout said a plan to make no bond payments for three years is disputed by bondholders, a clash of legal views that must be resolved.

The city’s five-year plan to create a general fund reserve of 15 percent by 2015 while “supporting a breadth of services” may also include placing a tax increase before voters next year in November.

Reporter Ed Mendel covered the Capitol in Sacramento for nearly three decades, most recently for the San Diego Union-Tribune. More stories are at