Vallejo's Chapter 9 plan

The City of Vallejo has filed its Disclosure Statement and plan in its Chapter 9 bankruptcy case.  The plan proposes paying general unsecured creditors, mostly employees and retirees, about 5 cents on the dollar from a $6 million fund, an amount roughly equivalent to the legal fees paid in the case through December 2010.  Vallejo apparently did not finance capital projects with unsecured general obligation bonds typical of many state and local governments.  Instead it had complex financing using sale and leaseback arrangements with certificates of participation, with certain city revenues earmarked as collateral for the financing, in a kind of factoring or receivables financing deal.  The resulting $50 million or so in non-employee debt was therefore secured, and because of a prepetition default, was held by the bank that insured the deals.  The plan proposes to pay these claims in deferred payments, at a reduced interest rate, represented as a 40% reduction in their present value, i.e. 60 cents on the dollar.  It is hard to say what precedent this will set for other local governments considering a bankruptcy.

What the disclosure statement does not quantify is the savings/cuts in employee wages, health care and pensions resulting from the rejection of the prepetition union contracts and their replacement with new contracts.   Depending on which commentator you read, Vallejo has either impoverished its workers to repay the bank, or missed an opportunity to tackle the greedy unions.  Because the cuts in worker pay and benefits were negotiated as part of an executory contract rejection, the disclosure statement doesn't really spell out in clear terms how losses were allocated among taxpayers, banks and workers.  Of course, the disclosure statement has not been approved yet.