As Vallejo slogs through its third year of bankruptcy, city officials are giving local police a blunt choice: Forgo a raise or the city will lay off officers to pay for others' raises.

Mat Mustard, head of the police union, says more officers are needed to combat Vallejo's high crime rate. City council member Stephanie Gomes opposed the 2009 labor contract. (Max Whittaker for The Wall Street Journal)

The ultimatum is rooted in a contract that the city struck with police in January 2009. Under the agreement, Vallejo promised to lift police pay to bring it in line with seven Bay Area cities this year and next. Vallejo officials estimate this year's raise at 7%. Some city officials say they thought they could support the raises at the time because they believed Vallejo had bottomed out. They also were worried about cutting back on policing in a city struggling with a high rate of violent crime.

But now, as tax revenue continues falling, "the bottom line is there is no additional money available," says Sandy Salerno, chief negotiator at the Vallejo City Manager's Office. "It's a zero-sum game."

Cash-strapped city governments pushing for concessions to public-employee contracts struck before the sharp economic downturn aren't unusual these days. In Oakland, 80 police officers were laid off this week after negotiations between the city and police officers' association over how to save the jobs failed.

What makes Vallejo's case stand out is that the contract that left the door open for raises was inked eight months after the city filed for bankruptcy protection in May 2008.

Vallejo, a bedroom community of 115,000, is the biggest California city by population ever to enter bankruptcy and the only one to do so since 2001, says Marc Levinson, the municipality's bankruptcy attorney. Though he says the North Bay town could emerge from bankruptcy by the end of the year, its tax revenue is projected to fall to an estimated $63 million for the 12 months that began July 1 from $84 million three years earlier.

Vallejo is "going to be dealing with the fallout of this for decades," says Michael Coleman, fiscal-policy adviser to the League of California Cities, an association of city officials.

Stephanie Gomes, one of two Vallejo city council members who voted against the police contract, says it overpromised and shouldn't have been passed. "Approving this police contract was the type of thing that got us into this mess in the first place," she says, adding that it showed a "lack of political will" by elected officials.

But Erin Hannigan, one of five council members who voted for the agreement at the time, says promising competitive wages was necessary to retain officers. She adds that if crime in Vallejo worsens, that will hamper its economic rebound.

Vallejo Police Officers' Association President Mat Mustard declined to say whether police are considering giving up the raise, which took effect July 1 but won't start showing up in paychecks until October. "All the cops are looking for is stability," he says.

There is little doubt something has to give. Vallejo's finances have long been dominated by labor agreements. As the city's tax revenue slumped in the recession and Vallejo entered Chapter 9 bankruptcy in 2008, 83% of its general-purpose revenue was dedicated to police and firefighters, according to data from the State Controller's Office provided by Mr. Coleman. That compares with a median of 68% among California cities that like Vallejo don't have their own library and parks departments.

Since then, Vallejo has renegotiated contracts with three of its four labor unions and will slash general-fund spending by 27% to an estimated $63 million in the current fiscal year from $87 million three years ago.

At the same time, Vallejo's police force has dwindled to around 95 officers from 158 in 2004, as departing officers aren't replaced. Officers haven't had a raise in three years. Vallejo's top-tier officers currently make $96,000 a year in base salary, not including premium pay and benefits, says Ms. Salerno.

More police are needed to combat a persistent high crime rate in this middle-class city, says Mr. Mustard, a police detective. Vallejo now has less than one law-enforcement officer per thousand residents, compared with 2.5 officers per thousand residents nationally and three per thousand in San Francisco as of 2008, the latest year for which national data are available, according to the Federal Bureau of Investigation. Though Vallejo ranked 50th among California cities for population in 2009, it ranked 19th for violent crime, with 998 incidents last year, including 10 murders, says the FBI.

When the city signed the new contract with police in January 2009, city officials won some concessions. Among other things, officers agreed not to try to reclaim pay and benefits they conceded after Vallejo emerges from bankruptcy. Still, city council members say the fear of losing more officers and the threat of binding arbitration-which gives an independent arbitrator the final say in contract disputes-made them reluctant to push for steeper concessions.

Earlier this year, as Vallejo's tax revenue continued sliding, it became clear that the city couldn't raise police salaries without cutting elsewhere. In May, the city manager gave police the choice of giving up the raise or facing seven layoffs. Since then, the police department secured funding for some positions from external grants and one-time revenue, and one officer said he will resign, reducing the number of potential layoffs to two, says Susan Mayer, Vallejo's assistant finance director.

Mr. Mustard says police have offered to renegotiate the terms of the contract in exchange for extending the agreement.

In June, voters struck down Vallejo's binding arbitration law, giving officials more leverage in future contract negotiations.

Says Ms. Salerno, the Vallejo negotiator: "Everybody is having to make choices that nobody would want to make."