Thursday, May 8, 2008

City Of Vallejo, California Declares Bankruptcy: Will More Cities Follow?

Rarely do cities of a decent size declare bankruptcy, but that is exactly what the city of Vallejo, California, home to more than 100,000 people is doing. Hurt by falling property tax revenues, a stagnant economy and the failure to renegotiate key deals with unions, the city of Vallejo was left with little choice. The questions now are: How will this bankruptcy affect residents and business owners in the city? And is this city’s bankruptcy just a glimpse of what is to come?

A bankruptcy is harsh reality; it is in essence the proclamation that you can no longer afford to pay your debts, and you need help. It is especially bad when a city makes this declaration because it affects a lot of people. Taxpaying residents and business owners expect their cities to provide certain things in exchange for their tax payments. These things include security, infrastructure and so on, which are absolutely vital to a city and its residents' well being. When a city goes bankrupt, residents and business owners usually see dramatic cuts in the services they receive. In addition, the city’s patrons can also expect rising taxes as the city tries to climb out of the hole. Neither of these things are good for the people living and working in the city, and they also tend to be a detractor when it comes to getting new people and businesses to move to the city.

The problems in Vallejo are not isolated--it is likely that many other cities across the country are also experiencing them. During the housing boom Vallejo was able to pay for all the services on the back of increased property taxes, but as housing prices started falling hard and fast, they saw their coffers run dry. This is a common occurrence in boom and bust cycles. During the boom time, many cities see tremendous growth and they are often pressured to increase spending and undergo various projects in order to keep up. When the boom is over, they are left with all the expenses of the boom, but much less revenue with which to pay for them.

The people and businesses that moved to Vallejo during the boom did so with the expectation that things would continue on as they were then. Now, with police and fire forces at the bare minimum and infrastructure maintenance in question, residents are not getting what they planned on. Normally when cities are short on cash, they can raise needed funds via a municipal bond offering to investors. Considering the dire straits Vallejo is in, and its pending bankruptcy, that option is basically nonexistent. In order to get added services Vallejo has to raise taxes, and that is typically not a good way to stimulate a local economy. Already people are hesitating to move to Vallejo because of its financial condition, and it is likely that it will also force some residents and businesses out. If this happens it could lead to a negative spiral affect that could completely destroy the city. Look at some of the cities in Ohio for an example of what happens if residents and businesses leave in masse.

The city of Vallejo is not alone in its financial trouble, and as the housing crisis continues to leave its mark and the economy continues to struggle, it may not be the last city to declare bankruptcy. Considering the impact that something like this can have on the well being of a city, it might be wise for investors to add a new layer of due diligence to their property purchases: studying the city’s financials.

*The picture above is of the California Maritime Academy in Vallejo, CA and is courtesy of iamu-edu.org

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10 comments:

June 14, 2008 at 7:44 PM Anonymous said...

California is the only state that I know of that will allow public employees to retire at 90% of their pay with as little as 20 years of public service. As a former resident, 30 years removed, I always viewed this as unsustainable and would reach a self limiting point eventually. The only surprise is that it has take 30 years for it to start happening.

Public employee unions own your state legisature and nobody cares. Perhaps this downturn in the economy will force a much belated wake up call to the working stiffs paying these bills.

July 9, 2008 at 7:08 PM Anonymous said...

Yes,the city of Vallejo is not alone with bankruptcy I feel many more cities to come. I also feel Vallejo could have avoided some of this by letting some businesses come to town.Also some type of rent control with some of the slum landlords;properties are a piece of junk and no ones willing to pay
the price.The houses for sale are also very high compared to other cities you see what you can buy.
Need I say not targeting any race
but america makes it real easy for
foreigners to come purchase a house
paying the mortgage with just social security what about the american citizens thats been struggling all there life? OH,and about businesses in Vallejo I dont think the owners get the picture bad business=loss of sales eventually loss of business people are just refusing to spend money where they are not comfortable at.Need I say Vallejo is a great place to live and I believe they have a great mayor who is trying
everything he can to turn this city around.

August 1, 2008 at 10:09 PM Samuel Clemens said...

Anonymous of July 9th,

Was this message texted from a cellphone? Your grammar and syntax is appalling even by internet standards. I can hardly believe the blog moderator approved your rambling message.

Perhaps you could find a 5th grade student to explain the use of the paragraph and proper punctuation so that your comments will not all run together in the future, obscuring your ideas from comprehension.

Anyways, I am curious exactly how it is possible for a foreigner to come to the U.S. of A. and purchase a home on social security? I can only assume you must know more about the topic than me, seeing as it is your system, but my understanding was that social security was a retirement benefit that was paid into by legalized citizens while they worked and collected on after they retired. It is a little confusing then how any race of foreigners could then make good on the scheme as you depicted. As a foreigner who has idle savings in a foreign currency I am interested in purchasing some cheap properties to either rent back to residents, flip or just keep as a vacation home. But your way sounds better.

Please give more details (I can only hope I am the correct race) so I can explore this avenue to getting a piece of the American dream (without the accompanying Government debt).

Thanks and good luck with upgrading your language skills.

January 26, 2010 at 11:55 PM Bob said...

Yes, i think more cities will follow Vallejo and file bankruptcy. I don't know more about bankruptcy when filed by city/country but it can happen in future. I have filed personal bankruptcy using DIY4LAW - online service for bankruptcy filing.

February 7, 2010 at 10:52 PM Maybelle said...

Nice conceptual blog on bankruptcy. Bankruptcy helps to collect personal economic information. Filing for bankruptcy on your own is possible however it is a practice that take a lot of endurance and carefulness. http://debt-consolidationloan.org/Bankruptcy.php

March 6, 2010 at 7:45 PM Anon said...

There are many/ cities that are following Vallejo in filing for bankruptcy. It almost seems like a new trend for 09/10 years. So many people have lost everything during these years and they have no other choice than to file.

May 9, 2010 at 9:30 PM file bankruptcy said...

I think Vallejo could have avoided some of this by letting some businesses come to town..

June 10, 2010 at 3:59 AM Bankruptcy Lawyer said...

I hope this beautiful city find the way out of the debts.

August 23, 2010 at 2:40 PM Mike said...

Certainly many cities are in debt and are following thr rising trend of seeking bankruptcy protection by filing bankruptcy to restructure their debt.

October 9, 2010 at 3:35 AM Debt Settlement said...

What to speak of a city, if the nations like Ireland and Greece has to declare their great financial crisis.It is really sad move and will affect many people but it is also a solution to overcome the present financial status.

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