BANKRUPTCY QUESTIONS AND ANSWERS

(Updated March 25, 2010)

1. Why did the City file for chapter 9 protection?

For the years preceding 2008, the City of Vallejo had difficulty balancing its contractual commitments in its General Fund with its General Fund revenues. For 2005-06, 2006-07, 2007-08 fiscal years, General Fund expenditures have exceeded revenues by $3-$4 million per year, resulting in a reduction of General Fund reserves. At the time of the bankruptcy filing, projections were that the City’s General Fund reserves would be depleted by June 30, 2008 and that in Fiscal Year 2008-09, General Fund  expenses could exceed General Fund revenues by $16 million meaning that the City could not meet its obligations and was technically insolvent. The City was unable to reach agreements with its primary creditors (employee labor associations) that would ensure ongoing General Fund solvency.

The May 6, 2008 City Council staff report (Item 10A) describes the background and recommendation regarding the City decision to approve a filing for chapter 9 protection. The link to the staff report is as follows:
http://www.ci.vallejo.ca.us/uploads/253/A050608%20agenda%20with%20packet.pdf

2. What is chapter 9?

Chapter 9 refers to the portion of the United States Bankruptcy Code that provides a financially-distressed municipality, like the City, protection from its creditors while it develops and negotiates a plan for adjusting its debts. Once the municipality files for protection under chapter 9, it is referred to as a “debtor.” During the chapter 9 case, the debtor may continue to conduct business and operations as usual. Due to limitations placed upon the power of bankruptcy courts in chapter 9 cases (required by the Tenth Amendment and the Supreme Court’s decisions in cases upholding municipal bankruptcy legislation), the courts generally are not as active in managing a municipal bankruptcy case as they are in private sector chapter 11 reorganization cases. The functions of the bankruptcy court in chapter 9 cases generally are limited to approving the petition (if the debtor is eligible), hearing motions to assume or reject executory contracts and unexpired leases, confirming a plan of debt adjustment, and ensuring implementation of the plan. You can read more about chapter 9 at www.uscourts.gov.

3. How has the bankruptcy case affected the City’s ability to provide services?

The City is continuing to provide services during the bankruptcy case. For example, police, public works, development services, water delivery and fire protection services are being provided, City permits are being processed and issued and the City Council continues to meet and direct the policies of the City. The City will attempt to provide the breadth of services consistent with its existing resources. These resources are defined in the FY 2009-10 Budget (governing the July 1, 2009 – June 30, 2010 time period). Staffing and resource levels have required the reduction in certain services (e.g. counter hours).

The City Council adopted the FY 2009-10 budget which defines the level of service for the current fiscal year.  The City Council and staff continue to attempt to provide the highest quality services possible to the community with the resources that are available.

Bankruptcy is giving the City an opportunity to restructure its General Fund debt and negotiate payment plans with its General Fund creditors.

4. How are vendors impacted by the bankruptcy filing?

The City has continued to contract for certain services and continues to pay its vendors in its normal payment time frame, consistent with the City’s practice prior to bankruptcy.

5. How could bankruptcy help the City?

The bankruptcy process is designed to allow the City to adjust its contractual obligations. The primary objective is to create a long-term solution to the ongoing General Fund annual operating deficit.

6. Why was the General Fund operating at a deficit prior to the bankruptcy filing?

City expenditures have increased at a faster rate than revenues. This trend was exacerbated by the recent economic slowdown. Detailed information on the City’s historical General Fund revenue and expenditures is presented in the May 6, 2008 City Council staff report (Attachments D and E) described above and subsequent staff reports on October 28, 2008, January 26, 2009,  February 24, 2009, October 13, 2009 and November 17, 2009.   The City’s FY 2009-10 budget is available on-line and provides additional financial data regarding revenues and expenditure projections.


7. To what extent has the declining economy impacted the General Fund?

The housing and economic downturn that began in 2007 has contributed to a dramatic decline in local housing values, which has a corresponding impact on assessed valuation and the resulting property tax available to local agencies (counties, schools, and special districts, as well as cities). City revenues are hit in four ways from the housing crisis. First, lower assessed values result in lower property taxes. Second, fewer new housing starts and fewer sales of existing homes have dramatically reduced housing development with its related development fee revenue and have reduced the level of property transfer tax revenue received by the City. Third, the overall credit crunch and receding economy have dampened sales tax growth. Finally, comparable revenue declines at the state level put several state-funded grants and programs at risk.

8. Why had expenses increased prior to 2008?

Personnel costs comprise nearly 75% of the General Fund. At the contracted rates, public safety salaries were expected to increase by 21.4% over 3 years (fiscal years 2006-07 to 2008-09) and non public safety salaries were expected to increase by 0 to 10.1% during the same period. Additionally, health care and pension costs for current and retired employees have increased at a much faster rate than other costs. The City has also been subject to increases in the costs of supplies (e.g., fuel) and services.

9. What has the City done to increase revenues?

The California Constitution limits local/city control over most tax and many fee revenue sources. Proposition 13 sets property tax rates and caps on the annual growth of parcel assessed valuations. Sales tax rates also are controlled by the state Bradley-Burns act, with the exception that the local electorate can vote to self-assess at a greater rate for specific or general programs. Fees, assessments, and any new or increased taxes are subject to the constraints of Proposition 218. Fees only can be assessed and used to recover the actual cost of service, and assessments and taxes require property owner and/or voter approval. Federal and State grants for ongoing and supplemental programs are subject to the annual budgeting cycles and unexpected fluctuations in allocations from those levels of government. The State of California routinely has manipulated revenue sources traditionally allocated to local governments to solve its own budget problems. It has reduced the level of property taxes allocated, has swapped those revenues for sales tax revenues needed to secure financing for its own deficits and, despite limits placed on its actions by a recent constitutional amendment, has the power to borrow local revenue when it declares a fiscal emergency. The overall environment creates limited options for cities to control the revenues needed to support their municipal services.

Recent efforts to improve General Fund revenue have included implementation of a cost allocation plan to ensure other funds (e.g., Housing and Water) are charged appropriate costs for services provided by the General Fund (e.g., payroll, legal services). In 2007, the City implemented an updated development services processing fee schedule to ensure full cost recovery of permitting processing activities.

In addition, in July 2009 the City implemented an updated Fee Schedule to reflect increases in certain fees. Also, the City Council approved increases to its Parking Fine Schedule and False Alarm Fees and the implementation of a fee for misuse of the 911 system.

Measure U, which was placed on the November 3, 2009 ballot by the Vallejo City Council to update the City’s existing Utility Users Tax was passed.  The measure simply replaces outdated language in order to protect the revenue generated by the UUT from changes in future court rulings or technologies. Moreover, to make certain that this Measure is revenue neutral, Measure U will slightly reduce the tax rate on all telecommunication and video services from the existing 7.5% rate to a 7.3% rate.

Additional new revenue sources are being explored.  Recently, polling was conducted to assess voter opinion of a sales tax increase or parcel tax to fund municipal services.  The City Council will be considering this issue in the upcoming months.  The plan of adjustment may include revenue enhancement features.

10. What has the City done to decrease expenses?

Between 2004 and 2010, the City has reduced its General Fund workforce by 31%, from 494 to 340 employees. This has resulted in significant service reduction to the community in every city department, particularly Public Safety and Public Works. Additionally, funding to community organizations has been significantly reduced and in some cases, eliminated.

The City has engaged in discussions and mediation with labor groups in an effort to reduce costs. In the past decade, supplemental agreements have been made with labor groups that resulted in deferring and forgoing contracted salary increases and reducing staffing levels. The City was able to reach agreements with the Vallejo Police Officers’ Association and the Confidential, Administrative, Managerial and Professional Association resulting in over 6 million in General Fund savings through June 30, 2010. The International Association of Firefighters has agreed to the rejection of their contract and a new contract was negotiated with them which was approved by the City Council on March 23, 2010.    After attempts to facilitate an agreement between the City and the International Brotherhood of Electrical Workers (IBEW) failed, the United States Bankruptcy Court upheld the City’s motion to reject their labor contract.  Despite the fact the IBEW has appealed that ruling, the City has begun the process of negotiating a new contract with IBEW.

11. Who are the City’s creditors?

Creditors include trustees under various bond indentures, members of the City’s employee labor associations, retirees and companies that do business with the City.

12. How will bankruptcy affect the City’s ability to attract new businesses and development?

The City will continue to process planning entitlements and building permits. The City also will continue to work with developers on the implementation of approved development plans (e.g., Mare Island, the Waterfront and Downtown). The emergence from bankruptcy with a long-term solution to the City’s ongoing imbalance between General Fund revenues and General Fund expenses should provide more financial stability.

13. What effect will bankruptcy have on Vallejo's current outstanding municipal bonds?

The City of Vallejo has approximately $175 million in debt and lease obligations, mostly for Capital Improvement Projects for street improvements, water projects, the marina and other projects. Of those debts, the General Fund secures $52 million through five Certificates of Participation. The remaining debts are secured by other restricted enterprise funds such as the Water Fund, certain Special Assessments and Special Tax Levies. Four of the five Certificates of Participation associated with the General Fund are secured by irrevocable Letters of Credit through Union Bank.  These certificates were subject to a mandatory tender on July 1, 2008 and are now held by Union Bank.   The remaining General Fund Certificate of Participation is a fixed rate obligation guaranteed by a bond insurance policy issued by National Public Finance Guarantee.

During the pendency of the bankruptcy, the City of Vallejo has continued to make all payments on its non-General Fund obligations (including water revenue bonds, tax allocation bonds, and assessment and improvement district bonds) on time and in full.   The majority of this debt, approximately $62 million, consists of water revenue bonds, which are paid from the net revenues of the City’s water enterprise.  On May 12, 2009, the City adopted a new five-year rate schedule for the water system, which is expected to meet the financial requirements of the enterprise through FY2013-14. The  Special Assessment and Special Tax secured debt is not expected to be affected by the chapter 9 case.

Payments on General Fund debt service, however, have been paid at less than contractual rates since July 1, 2008.  Interest was paid at a reduced rate from July 2008 until April 2009, when the City temporarily suspended all General Fund principal and interest payments from May 1, 2009 through July 1, 2009.   Payments resumed with adoption of the Fiscal Year 2009-10 budget which reauthorized principal and interest payments at a 2% interest rate, which is a less than both the respective contractual variable and fixed rates due on these issues.   Future and ongoing General Fund debt service payments will be subject to and may be affected by the outcome of the chapter 9 case.

For additional information, please see the Material Event Notices of May 8, 2008 and May 1, 2009 posted on the City's webpage at www.ci.vallejo.ca.us under Bankruptcy/Budget and Financial Information.

14. Why are City of Vallejo retirees considered creditors in the City's chapter 9 bankruptcy case?

A creditor is defined in the Bankruptcy Code to include a person holding a claim against the debtor that arose before the filing of the bankruptcy petition. A claim is broadly defined to include any right to payment, whether or not it is reduced to judgment, liquidated, unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed, legal, equitable, secured or unsecured. Some retirees may have claims assertable in the bankruptcy case based on certain contractual obligations of the City to provide medical and health benefits, or to directly or indirectly fund pension liabilities.

15. Are the retirees' pensions and/or medical benefits at risk of being modified or eliminated in bankruptcy?

The City's goal in the bankruptcy case is to implement a plan of adjustment, which will modify its obligations to some, or even potentially all, of its creditors. However, it is too early in this bankruptcy case to say with certainty who will be impacted by any plan of adjustment or to quantify the potential impact. The Vallejo City Council adopted  a Bankruptcy Workout Plan on December 22, 2009 which discusses the need to address the costs of retiree benefits.  In this Workout Plan, the City proposes to reduce to a flat $300 per month the amount it pays retirees for health benefits.  In addition, because of links to active employee medical benefits for retired members of the VPOA and CAMP, as well as unrepresented employees have been reduced as of January 1, 2010.


16. Who will be representing retirees during the bankruptcy case?

The Official Unsecured Creditor’s Committee of Retirees was appointed by the Bankruptcy Court, and includes representatives from each of the bargaining units and retired exempt employees.  A link to Committee of Retiree’s information page is available on the City of Vallejo website at www.ci.vallejo.ca.us


17. How will retirees receive notice of important events occurring or pleadings filed in the bankruptcy case?

A May 28, 2008, bankruptcy court order authorizes the City to maintain a website in lieu of notice to individual creditors, such as the retirees. The website includes key pleadings filed in the case, and notice of important dates, events and hearings. Parties also may receive notice if they request special notice by the procedures set forth in such order. A copy of that order can be found on the City's bankruptcy webpage [Dkt. No. 48].

Additionally, unless otherwise ordered by the Court, all creditors, including retirees will receive notice of certain important events in the case, such as notice of a claims bar date, and notice of a deadline for objections to confirmation of a plan of adjustment.

18. How long will the City be in bankruptcy?

It is difficult to predict when the City will emerge from chapter 9. The City’s goal is to complete the process as expeditiously as possible, taking into account the needs of the residents and the community. The City Council and City staff are committed to working as quickly and as efficiently as possible to implement a plan to adjust the City’s General Fund debts for a long-term solution.

In order to emerge from bankruptcy, the City must adopt a Plan of Adjustment.  The City Council adopted a Bankruptcy Workout Plan on December 22, 2009 that contains the framework for negotiations with the City’s creditors and the development of its Plan of Adjustment.  A copy of the Bankruptcy Workout Plan is available on the City’s webpage at www.ci.vallejo.ca.us under Bankruptcy/Budget and Financial Information.

19. How can I find out more about the City’s bankruptcy case?

The City has created a special website, accessible via a link contained on the City’s webpage at www.ci.vallejo.ca.us to provide information related to the City’s bankruptcy case, including many of the documents and important papers filed with the bankruptcy court by the City and other parties. Additional information is available on a subscription basis on PACER, the Bankruptcy Court’s electronic docket system at www.caeb.uscourts.gov.

20. If I have a specific question regarding the City’s bankruptcy case, who can I contact?

Please e-mail your question to bankruptcy@ci.vallejo.ca.us and the appropriate staff member will respond.

21. May I file a pleading or pleadings in the bankruptcy case?

The Bankruptcy Court provides special procedures to allow unrepresented persons, also referred to as pro se litigants or as persons appearing in propria persona, to file and serve paper documents. As described on the Bankruptcy Court's website, bankruptcy petitions, pleadings and other documents on paper may be submitted for filing by mail or in person at the Clerk's Office public counters between the hours of 9:00 a.m. and 4:00 p.m. on all days except Saturdays, Sundays and legal holidays. Paper documents may additionally be tendered for filing by placing them in a document depository located outside the entrance to the Robert T. Matsui United States Courthouse at 501 I Street. The Sacramento Division’s document depository is accessible twenty four hours per day, seven days per week.

Additional information regarding the procedures for filing by mail, in person or by the document depository may be accessed on the Bankruptcy Court's website by following this link: http://www.caeb.uscourts.gov/faq/faq.asp#16.