Vallejo, California’s city council voted on May 8 to go into bankruptcy, saying the city doesn’t have enough money to pay its bills after talks with labor unions failed to win salary concessions from firefighters and police. The city council’s unanimous decision makes the San Francisco suburb the largest city in California ever to file for bankruptcy and the first local government in the state to seek protection from creditors because it ran out of money amid the worst housing slump in the U.S. in 26 years.

The city of 117,000 is facing ballooning labor costs and declining housing-related tax revenue that have left it near insolvency. The city expects a $16 million deficit for the coming fiscal year that starts July 1. Under bankruptcy protection, city services would keep running. It would freeze all creditor claims while officials devise a plan for emerging from bankruptcy. . . .

Once the city files its petition, a federal bankruptcy judge must decide whether the city is actually insolvent. If so, the case can proceed. If the judge rules the city isn’t legally broke, the case would be dismissed, said the city’s hired bankruptcy attorney Marc Levinson of Orrick, Herrington & Sutcliffe.

Police and firefighting salaries, pension and overtime consume almost 80 percent of the city’s $89 million general fund budget. Cities in California on average spend about 60 percent of their budgets on firefighter and police salaries, according to the League of California Cities.

— Bloomberg News