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.

MAJOR PAPERS:

• The Wall Street Journal reported that an alliance of cable, Internet and chip titans will announce plans to invest $3.2B in a company that will deliver Web access for laptops and cellphones using WiMax. The venture, valued at over $12B, includes Sprint Nextel Corporation (NYSE: S) and Clearwire Corporation (NASDAQ: CLWR) and will be backed by Comcast Corporation (NASDAQ: CMCSA), Time Warner Cable Inc (NYSE: TWC), Intel Corporation (NASDAQ: INTC) and Google Inc (NASDAQ: GOOG).
• According to people familiar with the matter, Robert Verrone, one of the most zealous commercial real-estate lenders during the industry's boom, will leave Wachovia Corporation (NYSE: WB) within the next week, the Wall Street Journal reported.

WEB SITES:

• Bloomberg reported that the Department of Justice is probing whether UBS AG (NYSE: UBS) helped clients evade American taxes. In an e-mailed statement, the firm said one senior bank employee was "briefly detained" by authorities.
• Bloomberg also reported that Vallejo, California's city council voted to go into bankruptcy. Officials said that after talks with labor unions failed to win salary concessions from police and fire fighters, the city does not have enough money to pay its bills.
• According to a rumor, TechCrunch reported that the Yahoo Inc (NASDAQ: YHOO) board of directors yesterday authorized Yahoo chairman Roy Bostock, rather than CEO Jerry Yang, to call Microsoft Corporation (NASDAQ: MSFT) CEO Steve Ballmer about re-starting negotiations.

Just last week I reported about the insolvency problems in New Jersey to Walletpop readers, see: The snowball starts in New Jersey. Now, that nasty old snowball has streaked across the country and landed in the California suburb of Vallejo, wreaking havoc on the local government there. CNBC reports that Vallejo Councilwoman Stephanie Gomes states "Our financial situation is getting worse every single day". Ask not for whom the bell tolls, it tolls for the heavy handed labor unions which have coerced sweet pay and benefit packages for the 30% of our workforce which is supported via tax dollars produced by the rest of us who actually make things.

The insolvency of Vallejo should come as no big surprise, and in fact Vallejo is just the leader of what will become a very large pack. Before the end of this year I envision the entire state government of California will be in tears due to a lack of spending cash. You've been warned, it's to become a nationwide trend.

We just can't expect that private sector declines will leave the government sector untouched. The toughest part is that there's nothing government agencies can do about it, except to cut spending or raise taxes. Local governments are in the business of taking constructive dollars from the people who created them and then throwing them into the bottomless pit of entitlements, waste and graft. Now, the chickens have come home to roost, and they're big, mean, ugly chickens at that.