Bankrupt City Could Serve As Model

"There's a wave of this coming across the U.S.," said Sajan George, an adviser to struggling public entities who worked on restructuring Orange County after it declared bankruptcy in 1994. "What happens in Vallejo could definitely set a precedent."

Battered by the plummeting housing market and skyrocketing public employee contracts, Vallejo made dubious history Tuesday night by becoming the largest California city to declare bankruptcy. The North Bay city of 117,000 was on track to start the fiscal year July 1 with a $16 million deficit and no money in reserve.

By declaring Chapter 9 bankruptcy, the city hopes to freeze its debts and gain time to renegotiate its police and fire contracts, which comprise about 74 percent of its $80 million general fund budget. It also hopes a judge will void part or all of the contracts, allowing the city and unions to start from scratch.

Because so few public entities have declared bankruptcy, no one's sure how labor contracts will be affected. Vallejo's public safety unions have vowed to fight the proceedings, arguing that the city has plenty of money stashed in hidden accounts and is using bankruptcy to avoid paying police and fire fighters what they're owed.