City of Vallejo goes bankrupt after property crash hits taxes

The city of Vallejo, very briefly the capital of California in the middle of the 19th century, has returned to national prominence for a much less edifying reason: it is about to become the first city in the history of the state to file for bankruptcy.

The collapse of the housing market, which has hit parts of California more severely than almost anywhere else in the US, was the final straw for the city of 117,000 residents, which was already struggling to pay its public employees and service its debts. With house prices in Vallejo and the surrounding area down some 26 per cent on a year ago, and transactions drying up, the city is expecting $1.6m (£800,000) less in property sales taxes. On top of that, the impact of lower home values and high energy costs on consumers has further dented a local economy that never really recovered from the closure of a big shipyard in 1999.

Vallejo's council members voted on Tuesday night to file for bankruptcy protection before the city coffers run dry around the end of next month. They had attempted to deal with a projected $16m budget shortfall by cutting the pay of firefighters and other public employees, but talks with unions had proved fruitless. The city's Mayor Osby Davis told residents at the meeting that he had "turned over every rock he could find to find a solution" but had failed.

Although the city's problems are extreme, and in part self-inflicted as a result of public wage bills getting out of control, they do highlight how the housing market downturn is taking a toll on local government budgets in areas where the boom of the past few years has turned to bust. The most recent Case-Shiller house price index, which measures sale prices in 20 major metropolitan areas across the US, showed an average decline of 12.7 per cent on a year ago, but that masks extreme regional variations. In many parts of California and adjacent states, a buy-to-rent bubble and a burst of housebuilding activity in recent years have left communities to suffer steeper falls than the national average.