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