- Associated Press - Sunday, July 22, 2012

VALLEJO, Calif. — Cobblestones show through the decrepit pavement in Sheila Dodson’s downtown neighborhood, prostitutes ply the sidewalks in broad daylight and many of the century-old Victorians stand empty. Yet this is where Ms. Dodson wants to raise her family.

“Just because the coffers are poor doesn’t mean there’s not opportunity,” she said while walking with her toddler daughter along the broken streets.

Vallejo has emerged from bankruptcy with a newfound commitment to community involvement that is exemplified by upbeat residents like Ms. Dodson and a local government now focused on innovation. But the financial fixes envisioned when the city filed in 2008 haven’t all materialized, and Vallejo continues to operate in the red.

With two other California cities recently filing for bankruptcy, a third about to and others in trouble, Vallejo offers an example of what good — and bad — can come from a Chapter 9 filing.

“Bankruptcy brings a brutal recognition of the new normal,” Vallejo Councilwoman Stephanie Gomes said. “The cities that are going to stay solvent are the ones that can evolve.”

For Vallejo, a working-class community of 116,000 in the sun-splashed hills 30 miles northeast of San Francisco, the move toward bankruptcy was a slow downward spiral beginning with the closure of Mare Island Naval Shipyard in 1996. The local economy never really recovered, but a booming housing market helped paper over the loss of the city’s economic engine.

Initially after bankruptcy, things were worse than anyone imagined they’d be. Road maintenance in the city was cut by 90 percent, staffing at the police and fire departments were nearly halved, and grants for arts and recreation programs were eliminated.

Some city workers were unprepared for how bad things would be during the restructuring and now wish they had done more to avoid it.

Matt Fenzl, spokesman for the Vallejo firefighters union, likened the employees’ mentality to a child who is given ice cream every evening and then suddenly told the treat is unhealthy.

“We had a false sense of what was sustainable and what wasn’t,” he said. His advice to public employees in other struggling cities: “Be ready to make significant sacrifices to avoid bankruptcy.”

During the restructuring, Vallejo escaped at least $32 million in debt, paying some creditors as little as 5 cents on the dollar. And up to $100 million in health care obligations were removed when the city cut benefits for retirees to $300 per month, down from $1,500 in some cases.

But Vallejo also racked up $13 million in legal bills and was unable to rework its pension plan, still a $165 million unfunded liability.

City leaders reached new agreements with each of Vallejo’s four public employee unions. But the contracts didn’t provide the cuts Vallejo needed to fully climb out of its financial hole and now the city is spending $4.8 million more than it is taking in.

“It is painful to say to people who supported you in an election that I have to cut your salaries. That’s hard,” said Mayor Osby Davis, who has held that seat since 2007. Still, he said bankruptcy provided an opportunity to do more, and the city didn’t take full advantage.

Residents have lowered their expectations for city services and are stepping in to fill the gaps. Volunteers patrol for code violations, hold weekly graffiti cleanups, monitor the city’s high-end surveillance cameras and have built a sprawling wooden playground. The number of neighborhood watch groups grew from four to more than 300.

“In a weird kind of way, the bankruptcy was a blessing,” said Kathy Beistel, who founded the Kentucky Street Watch Owls after two pimps got into a shouting match on her lawn and the police failed to respond to her call. “I used to know two people on my street. Now I know everyone around me.”

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