Vallejo's Frist

Who will be second?

Feb. 27 (Bloomberg) -- 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.

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Municipalities throughout California are grappling with billions of dollars in labor and pension cost increases incurred during the late 1990s. The crisis comes as the worst housing slump in the U.S. in 26 years saps tax revenue. The state's own $16 billion deficit led Governor Arnold Schwarzenegger last month to declare a fiscal emergency.

Bondholders are ``creditors who would have to come to the table and it may be possible to adjust how much you are paying them and on what time period, which would, in effect, free up money that could be used as part of the plan to resolve the city's problems on a longer-term basis.'' John Knox, a public finance attorney with the law firm Orrick, Herrington & Sutcliffe, told the city council last night.