Municipal Default Alert: Vallejo, California

Do municipal bonds really never default? The Californian town of Vallejo seems to have gotten very close. Portfolio's Liz Gunnison filled me in on the details of the city's bonds, from Bond Buyer:

The city government and its related enterprises had about $201.1 million of outstanding bonds and certificates of participation as of June 30, according to the city's most recent comprehensive annual financial report.

All of this debt carries - for the time being - an investment-grade single-A credit rating. I think recovery rates on municipal bonds are normally in the 60% range, which means that bondholders could be in for $80 million or so in losses, if Vallejo's default isn't averted.

Comments

[erniem:]

This one is far from over. Vallejo pays 80% of it's budget for police and fire services. The only thing that kept the town going was the huge home price runup, sales to commuter from San Francisco, and the high property tax and transfer taxes. That is over, and Vallejo is only the first Ca city to start the downward rating path.

2008 Mar 02 10:03 AM

[rocky:]

A website put up by Vallejo residents before the last mayoral election in November 2007 had a list of firefighter salaries/overtime for 2006. All were over $100,000. The highest was about $379,000. #1 retired in 2007 and probably qualified for the maximum payout (3% credit for each year of service x 30 years of service = 90% of final year's compensation), or over $300,000 pension per year for life. That is surely the way to municipal bankruptcy. Many cities and counties in California and the State itself offer such a plan to public safety employees. Watch for library closings coming to a town near you. California's public employee pension law needs to be changed but I guess it will take a full blown financial crisis before the Democrats (who control both the Assembly and the Senate) have the guts to take on the public employee unions.

2008 Mar 02 10:46 PM

[helplessobs...:]

They must have closed their schools a long time ago, here in Va. 80% of our local budget goes for schools. One nice thing they have a bankruptcy plan executed by Orange County to guide them.

2008 Mar 03 02:17 AM

[mauldin0495:]

public employee $100,000 and above? that is outrage. that will just bankrupt local budget.

2008 Dec 06 06:14 PM

[duhmel:]

Schools are run by a separate school district and have a separate budget.

Vallejo bankruptcy strategy is to force changes to their labor contracts. The city has stated that they plan to continue paying their debts if allowed by the court.

Mar 24 11:34 AM