City of dreams and struggles

Nine months after this former Navy town emerged from bankruptcy protection, its Police Department is about a third smaller than at its peak. The Fire Department has been slashed by nearly a quarter, and the median home price has dropped almost 70%. Half of the downtown storefronts are vacant.

But when Shannon O’Hare looks at Vallejo, what he sees is “a dream come true.” A year after the city filed for Chapter 9, the artist and his wife bought their first house together here -- a three-bedroom post-Victorian -- for $142,000. Earlier this year they bought the former auto body shop that now houses their studio, Obtainium Works.

“Once my evil plan has come together -- making Vallejo the new art capital of the Bay Area -- all the yuppies will come here, drive us poor artists out and pay us $500,000,” O’Hare said.

A pause. A smile. “I plan to be here the rest of my life.”

O’Hare isn’t the only hopeful one here in the largest California city ever to emerge from Bankruptcy Court, a place that offers sobering lessons to the latest wave of troubled towns pondering their painful options.

On the plus side, the City Council recently passed its first post-Chapter 9 budget, a plan that socks away as much in rainy day reserves in one year -- 5% of the general fund -- as it had aspired to do over the next five. On the minus side, no sooner had the money been saved than the city had to tap it to cover an unexpected $4.5-million deficit.

Plus: With costs slashed and a new 1% sales tax bringing in nearly $10 million a year, Vallejo is able to hire again. Minus: The human resources department is so depleted, said finance director Deborah Lauchner, that “we’re really having a difficult time just accomplishing the recruitment work we need to do.”

Plus: Volunteers and technology have bolstered the short-staffed Police Department. Minus: Despite nearly 400 new Neighborhood Watch groups and a half-million-dollar system of cameras throughout the city, crime is still of major concern -- and no one is immune.

Three months ago, the mayor’s Harley-Davidson was stolen from the City Hall parking lot.

Still, “I feel excited about where we are,” said Mayor Osby Davis. “Although it was difficult, and it required a lot of stress on everybody ... I think we’ve done the right thing. And now we’re doing all the things to bring our city back.”

Vallejo’s fiscal woes were a generation in the making.

In 1992, the city convened a citizens task force to examine government revenues and spending and then draft recommendations for how the port city could remain in the black.

The conclusions were bleak.

“Your pensions are not sustainable,” Davis recalled the report warning. “Your salaries are not sustainable. Your healthcare is not sustainable. We recommend that you deal with those immediately.”

Unless Vallejo changed its ways, the committee said, it would have to file for bankruptcy protection in 2010. The petition seeking reorganization came in 2008.

Creditors filed $479 million in claims against the city during the process.

Once the final calculations are done, Vallejo will have paid out about $6 million, or between 20 cents and 25 cents on every dollar it owed.

During a recent interview, as auctioneers sold off foreclosed homes from the steps of City Hall, Davis considered the impact that filing for bankruptcy protection had on this community of almost 116,000 residents, 30 miles northeast of San Francisco.

“People ask the question ‘Was it worth it?’ ” Davis said. “That’s not the right question. ‘Worth it’ means that you have an option. We didn’t have an option.... And now we have that stigma of a bankrupt city, so we have a difficult time getting people to come here and develop economically.”

Plans to redo the ailing downtown and waterfront have slowed to a crawl, but a number of businesses have opened in recent months.

Toys R Us left and then came back. Modular home builder Blu Homes took over a former ship and submarine shop on Mare Island, vacated by the Navy in 1996. Citibank is building a second branch.

“They recognize that if the city is at its lowest point, there’s only one way to go,” Davis said. “And that’s up.”

When officials think about what advice they would give to Stockton, San Bernardino and Mammoth Lakes as those cities enter bankruptcy protection, it would be the easier-said-than-done: Plan early.

Vallejo did not come up with a financial strategy until the Bankruptcy Court process was nearly half over. Officials had renegotiated contracts with two of four labor unions before they knew what was needed to put the city in the black again.

For example, the police union agreed to forgo things like minimum staffing in exchange for raises while the city was still struggling. But once officials got a handle on the post-bankruptcy financing, they found that those concessions did not go far enough.

“We didn’t have a plan in place and didn’t know the magnitude of the need,” Lauchner said. “We just came out of bankruptcy and don’t have a budget that can pay for itself without the use of reserves, and we still have to negotiate with all four unions.... We have work to do.”

But Vallejo’s finances are stable enough -- especially since voters approved the sales tax increase -- that the city has begun to think creatively, said Councilwoman Marti Brown.

For example, the just-approved budget contains money for a new “smart team” of five police officers and two code enforcement officers who will focus on the problem properties that pockmark Vallejo in the wake of the foreclosure crisis.

The city has also begun an experiment in participatory budgeting -- a process that probably will be a lot more fun than it sounds. Chicago and New York have tested similar efforts in individual council districts, but Vallejo will be the first city in the country to let all its residents vote on how to spend $3.4 million raised through the new sales tax.

“I’m really excited about the future,” Brown said. “We’re doing some cool stuff over here.”

But a walk through Vallejo’s troubled downtown is enough to dampen even the wildest optimism.

Georgia Street, a main drag, is a welter of antique stores, thrift stores, closed stores, empty stores.

Summer Smith is manager of Pieced on Earth, which has a bustling custom upholstery and interior design operation at the back of the store and sells handicrafts and the work of local artists at the front.

“We’re a service,” Smith said one recent afternoon. “The service businesses -- the lawyers, the insurance companies -- they’ve all been here a long time and are doing fine.... But the retail market down here is very slow. My retail space does not pay my bills.”

That’s a lesson LaVonne Sallee learned the hard way.

Three and a half years ago, the former Wells Fargo fraud investigator opened up the Barbie Lady Gallery on Georgia Street, where she sells edgy sculptures: colonoscopy Barbie, anorexic Barbie, a crucified Marilyn Monroe Barbie.

Foot traffic is so anemic that she’s open only one day a week -- Saturday, when the farmers market draws people downtown. She’s been in the red every month, plans to close her shop in December and is preparing for a move to Oregon.

Sallee has gotten hate mail for her latest statue, which she sets up on the sidewalk.

An outsize Barbie lies, eyes closed, in a white, satin-lined baby casket next to a somber sign of the times: “Barbie’s doctor has told her that the climate in Vallejo is not good for her health. If she stays here, she will certainly die. So Barbie will move to a climate where she will thrive.”

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maria.laganga@latimes.com