Vallejo proposes paying some creditors only 5% to 20%

Vallejo, which filed for bankruptcy in 2008, has proposed paying its unsecured creditors, who are mostly current and former employees, as little as 5% to 20% of the amount they say they are owed in a bid to return the economically shaky Bay Area bedroom community to fiscal health.

John Knox, a San Francisco lawyer representing Vallejo, said the proposal to not repay all debts is “probably rare” for a municipal bankruptcy. But he said it would save the city “tens of millions of dollars,” including claims for unpaid sick leave and vacation.

The plan, filed Tuesday in Bankruptcy Court in Sacramento, comes as other California cities maneuver to avert financial meltdowns. Chowchilla, in the San Joaquin Valley, missed a payment on a municipal revenue bond, and Bell, in Los Angeles County, struggles to remain afloat after its top officials spent lavishly on their salaries. But municipal bankruptcies are still uncommon. Orange County, which filed for protection in 1994, remains the biggest.

Vallejo, a city of about 121,000 on San Pablo Bay, was driven to bankruptcy by a crushing combination of declining tax revenues caused by the economic slide and housing market collapse, and the rising costs of its contracts with four city employee unions.

The city’s revenues have plunged about $20 million since it filed for bankruptcy, leading to drastic job cuts and reduced services, including police, fire, libraries and senior programs. The city has saved about $34 million by rejecting and renegotiating its labor contracts.

“The revenues of the city have declined pretty sharply,” Knox said. “Everything has been cut and this plan will at least provide a baseline of service.”

Vallejo, home to the Mare Island Naval Shipyard until 1996, has fallen on tough times. Early last year, 60% of the borrowers in the area owed more on their homes than they were worth. Wal-Mart left the city. The number of police officers dropped to 90 from 155. Three fire stations were shuttered. The city is falling far behind in the upkeep of buildings and roads.

Creditors, mostly former and current city workers, filed 1,013 claims for unknown amounts and $479 million in specified debts. The city intends to object to about $85 million in claims.

The plan, Knox said, “establishes a basis to resolve the claims of creditors to restructure the debt and put the city on a footing going forward that it can operate under.” Former and current employees would be paid $6 million over two years. Although their pensions would not be affected by the proposed deal, healthcare benefits for retirees would be cut.

The bankruptcy has cost the city almost $8.4 million in legal and professional fees so far.

Knox said that bondholders so far have not been affected by the bankruptcy.

He said he hopes creditors will vote for the plan, saving the city the cost of continued litigation and solving its fiscal mess so “it can operate without going into the red again.”

maura.dolan@latimes.com

john.hoeffel@latimes.com