Last week the Vallejo City Council voted to declare what is likely to become one of the largest municipal bankruptcies in U.S. history. The sorry story behind how this happened holds several instructive lessons for our San Diego regional cities.
The road to declaring bankruptcy could have been predicted some years ago. Located along the Carquinez Straitand bisected by Interstate 80, Vallejo was one of several blue collar suburbs in the greater San Francisco Bay Area that struggled as manufacturing in that region declined. When Mare Naval Ship Yard shut down as part of the 1993 round of Base Closures and Realignment (BRAC), several thousand jobs were lost. In the $100+ billion Bay Area economy, that loss was easily absorbed but for Vallejo it meant both a decline in sales tax revenues and assessed property values.
If BRAC 1993 was the first body blow to the City the next was a torturous history that led Vallejo to having some of the highest municipal salaries in the Bay Area. As papers throughout the nation have noted, Vallejo municipal employees enjoy salaries that are significantly above the median salary of workers at other Bay Area municipalities. A local watchdog group, www.ibvallejo.com, indicates that salaries and benefits make up 94% of the city’s general fund expenses. Moreover, these wages were set through multi-year contracts that made negotiating a way forward extremely difficult, bitterly contentious, and ultimately unsuccessful.
Finally, the housing crisis sent Vallejo over the edge. With foreclosures up and the number of property transactions way down, Vallejo’s main sources of revenues are not growing. Whereas Vallejo projects that salaries and benefits will grow from $66.7 million in 2005 to $86.2 million in 2009, property, sales, and transfer taxes are expected to be flat, growing from $35.9 million in 2006 to just $36 million in 2009. While the taxes imposed on utility users will make up some of that shortfall, it isn’t nearly enough. Given this combination of flat revenues and rapidly increasing salary costs, it is not that surprising that Vallejo has been forced into court to try to reorganize its finances and restructure its long-term obligations.
Pundits are suggesting that Vallejo’s experience is just the tip of the iceberg and that if the housing slump continues other municipalities will face similar situations. We agree. Throughout the San Diego region a number of cities are entering dangerous fiscal waters. Some, like Del Mar, face long-term structural challenges in balancing a relatively flat tax base with increasing costs. Others, like Chula Vista, are facing the problems brought on by falling property values and declining consumer confidence. While recovery in 2009 would likely mean that no city in San Diego County would face the kind of draconian options the Vallejo City Council faced, sluggishness in consumer spending and property values that extended into 2010 could stress the finances of cities in the region to the breaking point.
There are hopeful signs and things that certain cities in San Diego are doing that will help avoid Vallejo-like meltdowns. One is the use of 5 and 10 year fiscal forecasts – especially those that highlight the risks that are looming on the horizon. The work being done by Carlsbad’s newly confirmed City Manager, Lisa E. Hildabrand, deserves special recognition. Carlsbad is nearing the day when it will no longer have large tracks of land available for new construction. Consequently, the city can no longer expect major jumps in property tax from the conversion of raw land into new development or large year-over-year revenue bumps from development impact fees. Reports that identify revenue trends and fiscal risks can help the Carlsbad City Council avoid making commitments that it can not fulfill.
It is also striking the difference between Vallejo track record in trying to redevelop Mare Island and what happened at Naval Training Center- San Diego. However, unlike Mare Island where efforts continue to lag, the redeveloped NTC is nearing completion and has started to contribute to the local tax base.
If those are two positive contrasts, there are worrisome similarities between Vallejo and some of the region’s local municipalities. Like Vallejo, some cities in the San Diego region are spending a high percentage of their general budgets on salary and wages and are locked into multi-year labor agreements that are nearly impossible to adjust when revenues dip. Many of our jurisdictions face a looming crisis when it comes to employee health care and meeting those obligations for retirees that are living longer will prove daunting for cities whose revenues can no longer be easily increased by approving new development.
By entering Chapter 9 bankruptcy, Vallejo is going to be entering relatively uncharted waters. Other major municipal bankruptcies in California – for example Orange County and Desert Hot Springs - were brought on largely by external shocks that rapidly imposed new crushing liabilities on those jurisdictions. In contrast, Vallejo’s problems have been decades in the making, and in large part reflect an inability or refusal by politicians to make politically difficult choices. For those that care about municipal finances, Vallejo will face in coming years is more than enough reason to redouble efforts to ensure that municipalities in our region do not bite off more in long term obligations than taxpayers can chew.
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