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.”

Judd Gregg and Ben Nelson: More Socialism Please

As we find our economy subsisting on massive government spending and no-strings-attached bailouts, borrowed, of course, from future generations, what solutions do the same leaders who got us into this mess offer?

You already know the answer — more government handouts.

The latest gambit?

Politicians like Judd Gregg and Ben Nelson are fighting to keep the crooked $600 trillion derivatives market unreformed. The dirty not-so-little secret about derivatives? In their current form, they are basically government insurance where the bailed-out mega-banks get to keep the premiums but the taxpayer pays the claims.

Senator Gregg points out that good, honest American companies like Harley-Davidson and Caterpillar use these derivatives to hedge against things like currency changes and costs of materials. Hedging against price fluctuations is something that any smart business would want to do and should be encouraged.

What Senator Gregg doesn’t point out is that companies can already do this WITHOUT secret derivatives. They just have to buy them on a market exchange or, if it’s something unusual or exotic, go to an actual regulated insurer like Lloyd’s of London. If Mariah Carey can get her legs insured, I am pretty sure that Caterpillar can find a regulated insurer to cover a seasonal drop in steel prices.

The reason no one wants to cut this scam off is because it works out great for everyone except the taxpayer/sucker who actually pays the claims. The buyers get cheap insurance backed by the US government, the banksters (the big four: JPMorgan Chase, Bank of America , Citigroup and Goldman Sachs) get to keep the premiums and WE THE TAXPAYER pay the claims — and trust me, AIG is just the tip of the iceberg (note: Fannie + Freddie) in this ongoing derivative bailout!

Just because a few good, American companies like Berkshire Hathaway (major stockholder: Ben Nelson) like getting a sweet deal from the taxpayer doesn’t mean that we should keep giving them one. This is especially true when CEOs like Warren Buffet already knew they were a deal too good to be true when they bought them. It is time for us to cut off their welfare checks.

Too many politicians in this country have decided that socialism buys votes, especially when their generation doesn’t have to pay for it. But thankfully, there are politicians willing to keep our great country from falling further into this abyss and are willing to put an end to this ridiculous taxpayer giveaway.

Call or write your Senator and tell them to support real derivative reform or that they will pay the consequences come election time.

The Speech: The Good, The Bad and The Missing

The Good: The president had strong language for backing real derivative reforms.

The Bad: Vague language about the “Volcker rule” will not stop Too Big To Fail; but a plan like this (or even one like this) for breaking up the current mega-banks and limiting their liabilities will.

The Missing: NONE of this matters while our cops still work for the crooks.

To wit:

Our main form of protection against these kinds of financial criminals, the SEC, remains woefully underfunded. The revolving door between government regulators and the high-paying banks they supposedly regulate remains as fluid as ever. And does it get any scarier than White House Counsel jumping from President Obama’s side one day to Lloyd Blankfein’s the next? Actually, I guess it does when institutions that should fear the government instead now just declare all-out war.

Meanwhile, the complicit ratings agencies remain a government-sponsored cartel paid by the banks for their favorable grades.

But what is the final backstop that is supposed to protect us next time around under this new plan? Well, Secretary Timothy Geithner explained today on Morning Joe that they would be able to stop the next bailout if only they had the authority to do so. Then finally, they could do things like wipe out equity holders, replace management… you know, kind of like the same steps that they were somehow magically able to do with GM.

But we all know the truth — no one will do that to the banks until they are no longer Too Big To Fail. As William Black so eloquently told Congress this week, Mr. Geithner and Chairman Bernanke already had that chance to do this to the big banks last time around and they chickened out.

The only way to keep this from happening again is to break up these big banks now and it is up to us to find people with the guts to do so. Hopefully, one of them will be our current President.

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