Housing crash claims a whole city as Vallejo, CA declares bankruptcy


Chrissy Hynde of the Pretenders once sang about going home and finding that her hometown (Akron, Ohio, I think) was no more. "I went back to Ohio but my city was gone." Developers had destroyed the downtown and paved over the fields and all that was left was parking lots and shopping malls.

The people of Vallejo, California may be singing a similar song today, as the town's city council voted to declare bankruptcy. Vallejo is facing a budget crisis driven by the collapse of the housing bubble in California. And while the town is still there, its finances have been ravaged by falling property values (and thus taxes) and reduced economic activity (ditto). Once again, developers went too far, and now the hangover is setting in.

Critics point out that the housing bubble is only part of the problem. The fat tax flow during the housing boom masked deeper problems of high pay and benefits for municipal workers and unfunded but growing pension liabilities. Vallejo is now facing a $16 million shortfall and has no money in the bank.

The bigger question is whether this will encourage other towns to take the same path. Lots of cities in the U.S. are hurting from lower property values and tax payments these days, and bankruptcy may become a more attractive option as the recession -- oops, sorry, I meant "rough patch" -- gets worse.

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