In Vallejo, A Municipal Bankruptcy Means Big Sacrifices For Ordinary Workers

The American real estate boom turned Vallejo, California -- previously known for little more than the freeway that runs through it -- into a hot property market in the San Francisco Bay Area. But when the home-building stopped, so did the flow of money into municipal coffers, sending the city into bankruptcy nearly three years ago.

That was merely the beginning of sustained pain for Vallejo's municipal employees. As the community adjusts to a wrenching new budgetary reality, one no longer propelled by exploding property revenues, the burden has fallen on ordinary city workers.

David de Alba, a 45-year-old mechanic who has worked for the city for eight years, typifies this process. Vallejo has slashed its budget to get its books in order, reducing its general fund payroll by more than 100 workers, or about 30 percent, since 2007. De Alba has seen his monthly pay drop by about $1,000.

Last summer, after missing mortgage payments, he went into default. In November, he filed for personal bankruptcy. Financial troubles strained his marriage, and his wife left him, taking their teenage children with her. This month, the bank foreclosed on his house. He moved out last Friday, relinquishing his home of nearly two decades. He now plans to move to a trailer park.

De Alba puts the blame for this descent squarely on the city.

"They pretty much destroyed my life," de Alba says. "They put the whole burden on the working class guy."

Like cities across the country, Vallejo has seen its revenues wither in the wake of the recession, prompting pay cuts for municipal employees. In one regard, Vallejo's experience is unusual -- municipal bankruptcy remains rare, as it brings negotiations with employees into court proceedings. But the negotiations themselves are now commonplace: As cities like Vallejo struggle to get their fiscal houses in order, they are often doing so at the expense of their middle-class workers.

Vallejo's latest plan to emerge from bankruptcy, filed this month, illustrates a stark fact about municipal finance. If bondholders -- including banks and other financial institutions -- were to take a significant hit, that could send tremors through the bond market, raising borrowing costs for cities nationwide. This is why Vallejo and other municipal governments find themselves leaning most directly on their "unsecured creditors," those with no direct claims on assets pledged against debts. In plainest talk: They are zeroing in on ordinary workers and retirees, putting wages and benefits on the line.

De Alba and hundreds of other current and former Vallejo employees say the city owes them for the pay they were denied, when two labor contracts were rejected in court. But under the latest plan , Vallejo would compensate these workers and retirees for only a fraction of their claims. The people who make the city run -- firefighters, maintenance workers, engineers and others -- would be forced to help prop up the city's finances.

It's a bitter plan, as the city readily acknowledges. But, for now, it amounts to Vallejo's only hope to get back on its feet. The city of 120,000 has been in bankruptcy proceedings since May 2008. The legal battles, which have allowed Vallejo to restructure its obligations, have cost the city nearly $10 million and have angered the unions, as workers contend that Vallejo forced concessions they otherwise wouldn't have accepted.

"It's not a happy time," says Marc Levinson, the lead bankruptcy lawyer for the city. "What do you do? The money just doesn't appear."

A onetime Navy town tucked into a northern corner of California's Bay Area, Vallejo is most often traversed at high speed, on the drive from San Francisco to Sacramento along Interstate 80. In the 1990s and early 2000s, the local economy soared on the back of the real estate boom. From 1997 to 2000, building permits for new single-family homes increased over 10-fold, according to the city's financial statements. From 2002 to 2008, property tax assessments doubled.

But after the spectacular boom came a devastating bust. Since peaking in May 2006, home prices in Vallejo have plummeted 63.3 percent, according to data provider Zillow.com . The carnage there almost makes the national crash seem tame, as home prices nationwide have fallen 31 percent since their peak, according to the Case-Shiller 20-city index.

Vallejo's coffers buckled. Property taxes -- the city's largest source of revenue -- have dropped 33 percent since their peak, as sliding home values meant Vallejo couldn't collect as much from homeowners.

"In early 2008 the city confronted the reality that it would soon be unable to pay its bills as they became due," reads Vallejo's recent legal statement , in a passage whose straightforward language draws a striking contrast to the surrounding jargon.

Salaries froze when the bankruptcy began in mid-2008, and many city workers say they've missed two raises they otherwise would have gotten. Employees in the electrical and maintenance workers' union saw two wage cuts last year, together inflicting a 10 percent drop in pay.

"I've told my membership, don't go out and buy a new car," says Frank Caballero, 56, a senior maintenance worker who's president of the local division of the International Brotherhood of Electrical Workers. "There are things we're used to that we can't do anymore. You can't go out to dinner, you can't buy a new shirt if you want it. Everything is so tight right now."

Wages were cut further still. Previously, the city covered employees' health care. But as new labor contracts were drawn, maintenance workers and firefighters -- and retirees -- suddenly shouldered a fourth of those costs. Workers near retirement who have accrued payouts from not taking allotted sick days claim that that money, too, has been withheld.

One bad year can affect a worker for life. Pension benefits are calculated based on a worker's highest pay level, so a pay cut -- or even a missed raise -- ripples forward in time.

"If you're 26, and you're working for the city, it's not an issue, because at some point your compensation will exceed what it would have been back in 2010," says Dean Gloster, the lawyer representing the electrical workers' and firefighters' unions. "But if you're at retirement age, and you have a bad back, and you can't carry fire hoses up stairs anymore, and this is it for you, well, it's pretty tough."

Workers, retirees and other "unsecured creditors" claim the city owes them about $262 million. Under the new plan , these people could make as little as five cents on every dollar.

For de Alba, the mechanic, his annual pay has dropped from just over $70,000 to about $60,000, he says. The city owes him about $18,000 for the compensation he's missed since the bankruptcy began, he says, but he predicts he'll get less than $1,800. Caballero, the union president, is similarly pessimistic.

"They owe us this, but to tell you the truth, I don't see us collecting any of this from the city," Caballero says. "We're just trying to scramble to see what else we can do."

Vallejo's budget squeeze made de Alba fall behind on his mortgage. Monthly, his pay dropped from $5,800 to about $4,800. His mortgage, he says, was $2,300. He stopped paying the mortgage bills early last year. By summer, he was in default.

Characteristic of the real estate slump, the value of de Alba's home has fallen below the value of the loan. The house is now worth $130,000, he estimates. His mortgage, he says, was $380,000. As home prices continue to fall nationally -- and as foreclosures push prices down still further, in a punishing feedback loop -- more homeowners like de Alba are falling underwater.

After a series of missed payments, the bank sent de Alba a default notice last summer. He was granted a temporary mortgage modification, but the payments failed to stay at a manageable level. Facing growing obligations he couldn't meet, de Alba filed for personal bankruptcy in November. The foreclosure process, already underway, was delayed.

Financial stress, meanwhile, had soured his relationship with his wife. As the couple confronted the prospect of losing the home where they had raised five children and had lived for 18 years -- and which had once belonged to de Alba's mother-in-law -- their marriage fell apart.

"The financial strain just gave us more to argue about," de Alba says. "We already had issues going on, but it never helps when you have money problems."

Last week, with the bank repossession imminent, de Alba prepared to leave his home. He packed up what belongings he would take with him, put a few things in storage, gave some to his brother and threw the rest in the trash.

Throughout the house, possessions were in boxes. In the bedroom he once shared with his wife, pictures of his kids in sports uniforms -- baseball, softball, football -- once hung on the walls. Now, the walls were bare.

"It's a sad thing," de Alba says. "Rooms are empty where there used to be so much of our stuff."

At this point, de Alba is hoping to land a different job at the nearby city of Napa, doing the same work he does now. The new job would pay him more, about what he was previously making in Vallejo, he says. He's optimistic about his chances of getting hired.

Still, the Vallejo bankruptcy has filled him with a resentment that seems unlikely to go away soon.

"I heard so many times through this bankruptcy, 'You guys are lucky to have jobs right now,'" he says. "And you know, I'm not lucky to have a job. I tested for this job, I beat 80 other people out to get this job. I'm not lucky. I prepared myself to have a good job. But they didn't care about that."