Vallejo, California, the biggest U.S. city in bankruptcy, won court permission to send its exit plan to creditors, its municipal bondholders for a vote after retired workers dropped their objections. In summary, “The plan doesn’t alter securities tied to designated revenue sources, such as about $175 million in water revenue bonds, and other special tax obligations secured by special revenue of the city’s restricted funds, according to the documents. ”

U.S. Bankruptcy Judge Michael S. McManus in Sacramento, California, approved a disclosure statement for the plan in an order. McManus will take creditors’ votes into account when he decides whether to approve the plan at a hearing to be scheduled in the coming weeks. A hearing on the disclosure statement had been set for today. The retirees, represented by a court-sanctioned committee, were the last major objectors to the plan, which would cut labor costs and stretch out payments to other creditors.“The committee was concerned if the bankruptcy dragged on, their actual pensions might be jeopardized,’’ R. Dale Ginter, an attorney for the committee, said in a May 23 interview. During the bankruptcy, the city succeeded in cutting costs by firing employees, renegotiating union contracts and reducing what it pays to subsidize retiree health care. Vallejo, a onetime U.S. Navy town of about 120,000 on San Francisco Bay, sought protection from creditors in May 2008 under Chapter 9 of the U.S. Bankruptcy Code, after the recession eroded tax revenue and unions rejected wage cuts. Chapter 9 allows municipalities to reorganize debt rather than liquidate. The plan doesn’t alter securities tied to designated revenue sources, such as about $175 million in water revenue bonds, and other special tax obligations secured by special revenue of the city’s restricted funds, according to the documents. The case is In re City of Vallejo, 08-26813, U.S. Bankruptcy Court, Eastern District of California (Sacramento).” Source: Today’s (5-27-11) Bloomberg Municipal Market Brief.

Another great American tradition is found in the millions of decisions that pass through and from our court system. We are a nation of law. We have a system that respects contracts. It carries with it the notion that obligations that are undertaken are to be fulfilled in economic terms if they are reasonable.

Vallejo’s municipal bankruptcy occurred because the politicians who ran the city ignored these fundamental values and obligated the city taxpayers to unreasonable burdens. Now the court is throwing these excessively costly burdens out. After $10 million of litigation, we are getting to some resolution. Meanwhile, please note the highlighted portion of this news report. It states that the payment stream for the essential-service revenue bond that funded the supply of water to the city is intact.

Many have emphasized importance of essential-service revenue and of the legal construction that protects these bond holders. Here is a prime example. The city is in bankruptcy, yet the bond holder is getting paid.

Reposted with permission from our friends at Cumberland Advisors.