Eventhough Vallejo, CA is trudging through bankruptcy court its police union continues to demand pay raises.  Give credit to CNBC's Jane Wells for a gutsy update...or, perhaps, a look into the future for other US cities.

Two years ago, the Bay Area city of 120,000 went into a special kind of bankruptcy reserved for local governments called Chapter 9. It allowed the city of break contracts and suspend debt payments.

The city just approved a budget which faced a $20 million deficit. Deciding not to raise sales taxes and unable to borrow ("Would you loan us some money?" the mayor jokingly asked me), the deficit was closed through more cuts, including the closure of yet another fire station.

Expect a lot more potholes.

Yet in the midst of this, police officers will receive a 7 percent raise Thursday and have all of their healthcare costs covered. Total average salary with estimated overtime will now be $122,000, plus nearly $100,000 more in benefits and insurance costs. Sound insane? The city claims this was better than submitting to binding arbitration, which could have imposed an even bigger raise on Vallejo. Voters have since removed such arbitration from the city charter, but too late for this contract.

To cover the raise, 17 more officers will be let go, in a department which once numbered 155, but will now be 87.

It is a classic case of fiscal reality running head on into the cost of public safety, and it illustrates what may be a new chapter in tensions between management and unions.