Economy hobbles Calif. town

His roots run deep here. As a kid, 55-year-old contractor Randy Golovich played baseball, worked at the corner gas station, chased girls at the local soda counter. He helped his late father, a foreman at the old Mare Island Naval Shipyard, rebuild the family house.

The chummy, fast-talking Golovich also earned a good living in this waterfront suburb an hour's drive northeast of San Francisco. As Vallejo grew, his contracting business, Randu Originals Ceramic Tile, hauled in millions of dollars in sales over the years. The jobs kept coming. The economy kept booming. Traffic filled Tennessee Street outside his showroom.

Not now. The mortgage crisis, the limping economy and a recent bankruptcy filing by Vallejo — the first municipality to do so since Desert Hot Springs, Calif., in 2001 — have hobbled this town of 120,000. Golovich's business is hurting. Jobs and phone calls from customers have dried up. He's cut his staff and fleet of trucks in half, to six employees and four vehicles.

Golovich also could lose his home. When the interest rate on his $500,000 adjustable-rate mortgage rose to 10% from 7%, his monthly payment shot up to $4,000, and he could not afford it. Hoping to ward off foreclosure, he and counselors at the non-profit Vallejo Neighborhood Housing Services are working with his lender on a new payment plan.

Despite his woes, Golovich is hopeful.

"Driving through this town is depressing. It tears your heart out," he says. "But Vallejo's going to come back big, and when it does, I'm going to be the last tile store standing. I've just got to hold on and keep my house."

Vallejo's closely watched Chapter 9 bankruptcy filing in federal court in Sacramento may be a warning sign of dangers that could befall other cash-strapped municipalities.

Bankruptcy Judge Michael McManus will hear arguments starting Wednesday on whether to let the case go forward.

Vallejo's attorneys say the city faces a $17 million deficit and cutbacks in public services for the fiscal year started July 1. The city's police and fire department unions contend that Vallejo is not insolvent but that city officials are trying to dodge labor agreements and obligations to union members and retirees.

Vallejo's financial woes aren't unique, according to municipal-bond analysts and bankruptcy attorneys.

A convergence of forces — the housing bust and credit crunch, tax revenue shortfalls, pension fund costs for public employees and the shaky economy and financial markets — are making it increasingly hard for municipalities to balance their budgets.

"We're seeing a lot of governments around the country entering a period of flat or declining revenues," says Gabriel Petek, a municipal-bond analyst at Standard & Poor's. "I don't expect this to turn into an avalanche, but there may be isolated instances of distress."

Defaults' damage rises

Across the USA, 59 bond issues of $1.2 billion have defaulted this year, according to Richard Lehmann, publisher of Distressed Debt Securities newsletter and president of Income Securities Advisors, an investment research firm. The dollar total is almost higher than the past two years combined, he says.

Over the past 20 years or so, 1,100 municipal issuers defaulted on their debt, according to Standard & Poor's. Orange County, Calif., endured the largest municipal bankruptcy in U.S. history in 1994 after suffering $1.6 billion in investment losses.

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