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A Development to Watch

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From the invaluable Calculated Risks blog, Vallejo Close to Bankruptcy Filing:

Vallejo, a city of 135,000 outside of San Francisco, moved closer to bankruptcy after negotiations with its labor unions collapsed.

Bondholders will likely be asked to sacrifice some of their investment if the city seeks bankruptcy protection, an attorney for the municipality said last night. Vallejo faces ballooning labor costs and declining housing-related sales-tax revenue, leaving budget officials projecting that money will run out within weeks.

For people who have been hoping that the bottom may have been reached with real estate prices, I wonder what widespread municipal bankruptcy might mean.

Assuming that Vallejo’s municipal unions take the “devil take the hindmost” attitude that most unions do, the city will go bankrupt.  In bankruptcy, I assume the city’s finances will be administered by a magistrate or a bankruptcy judge.  (Although I have very limited experience with Chapter 9 bankruptcy, I did study bankruptcy law generally, so I’m assuming here.)

So.  Once bankrupt, will Vallejo (a) raise property taxes, or (b) lower property taxes?

If you guessed (b), bzzzt, go to the back of the line.

Maybe the court can set aside the union contract (as can be done in bankruptcy) and force the unions to negotiate all over with the now-bankrupt city, with court supervision.  But I don’t get the feeling that Vallejo is going to have a lot of services for the next few years, do you?  What would home prices in Vallejo look like a year from now, I wonder?

CR thinks that Vallejo is just the first in a long line of California municipalities that will be bellying up to the bankruptcy bar.

I think this is a development to watch.  Furthermore, it might not be a bad idea to take another look at your own town/city’s financials.  How’s their income — much of it tied to real estate via property taxes — compared to their pension liabilities and other generosities that cities flush with cash over the past few years have been showering on their public unions?

-rsh

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Rob Hahn
Managing Partner of 7DS Associates, and the grand poobah of this here blog. Once called "a revolutionary in a really nice suit", people often wonder what I do for a living because I have the temerity to not talk about my clients and my work for clients. Suffice to say that I do strategy work for some of the largest organizations and companies in real estate, as well as some of the smallest startups and agent teams, but usually only on projects that interest me with big implications for reforming this wonderful, crazy, lovable yet frustrating real estate industry of ours.

4 COMMENTS

  1. “Arnold to Vallejo: Drop Dead”
    doesn’t have the same ring to it as the Daily News Headline in 1975 when NYC was teeterig on the brink of bankruptcy:”Ford to NY Drop Dead” (which of course he never said)

    The difference here is the California municipalities appear to be suffering less from mismanagement of expenses and more from an erosion of their taxable revenue base.

  2. “Arnold to Vallejo: Drop Dead”
    doesn’t have the same ring to it as the Daily News Headline in 1975 when NYC was teeterig on the brink of bankruptcy:”Ford to NY Drop Dead” (which of course he never said)

    The difference here is the California municipalities appear to be suffering less from mismanagement of expenses and more from an erosion of their taxable revenue base.

  3. I think that’s the thing to look out for — if the financial problems of CA munis are due to a permanent decline in the tax base… that’s an order of magnitude more difficult to fix than just mismanagement.

    But at the same time, I do think someone somewhere has to look at the benefits/salaries of the public unions out in Cali (and elsewhere) compared to the cost/benefit of privatizing as much of that as possible.

    -rsh

  4. I think that’s the thing to look out for — if the financial problems of CA munis are due to a permanent decline in the tax base… that’s an order of magnitude more difficult to fix than just mismanagement.

    But at the same time, I do think someone somewhere has to look at the benefits/salaries of the public unions out in Cali (and elsewhere) compared to the cost/benefit of privatizing as much of that as possible.

    -rsh

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