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American Cities Filing Bankruptcy Because Of Insolvency

Three years ago, the city of Vallejo, California, was forced into filing bankruptcy due to what former city finance chief Rob Stout said was a rebellion by residents refusing to pay more taxes because they believed that police and fire salaries were already over six figures and they refuse to pay any more. Looking forward to November 2011, the voters in Vallejo approved a measure to increase the city’s sales tax by 1% creating a $10 million a year windfall for the cash-strapped city. This was a big help for the already broke city that was exiting from bankruptcy. With the extra funds people in the city believe that Vallejo has put the bankruptcy filing behind them and turned the corner.

If it wasn’t for the bankruptcy filing, the city would have not been able to toss out the contracts with the police and fire and allow them to reduce their pay and benefits. The police and fire departments were forced to sit down and renegotiate or face the court imposed rules that come with the Chapter 9 bankruptcy.

Over the last couple years, economists have been predicting a wave of bankruptcy filings by municipalities because the drop in the economy. So far, their predictions have not materialized, but those that are optimistic are very guarded. Many cities are sitting on the brink of filing bankruptcy right now and are looking for ways to raise revenues. Most residents don’t want to pay higher taxes to fix what they feel was overspending during the good times by the municipalities. Over the last 10 years, as the economy roared, cities gave raises and increased pension benefits to the point that they are now unsustainable. In California, most cities are under the CalPERS program that pays public safety workers 3% per year at a total of 30 years, giving the retiree 90% of their highest wage at an age of 50 years old. When people wonder why cities are filing for bankruptcy, all you have to do is look at the employee contracts of that city and it will be a no-brainer.

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