Vallejo's long and trying path through Chapter 9 bankruptcy will face another important step tomorrow in U.S. Bankruptcy Court in Sacramento. Retired city employees are upset about an October vote by the Vallejo city council to cut retiree benefits.
The retirees' attorneys claim that the city is treating the retirees differently than it is treating its other creditors. They contend that the city cannot commit to cutting retiree benefits until the city has a confirmed plan out of bankruptcy. Presumably, for a plan to be confirmed, the city would have to treat its creditors equitably.
Federal Bankruptcy Judge Michael McManus will hear the retirees' claims. He has a difficult job juggling the interests of a number of employees and former employees labor groups and ensuring that these groups, which often have competing interests, will be treated equitably. He has already made a number of controversial decisions, including approving the city's reduction in debt service payments on general fund obligations. Usually, bondholders are protected from sharing in losses with creditors.
Cities and credit rating agencies around the country are watching the Vallejo bankruptcy closely. Municipalities, particularly in California, are struggling with a steep decline in tax revenue. Judge McManus's rulings could help set precedents for future bankruptcy filings by municipalities.
