Vallejo Gets Judge's Nod to End Three Years of Bankruptcy

SAN FRANCISCO — Vallejo, Calif., won approval Wednesday from a federal judge to exit from three years of bankruptcy.

U.S. Bankruptcy Judge Michael McManus confirmed the debt-restructuring plan to allow the city to exit Chapter 9 bankruptcy protection during a hearing Thursday morning in Sacramento, according to Marc Levinson, the city’s lawyer with Orrick, Herrington & Sutcliffe.

The confirmation hearing is the final chapter in the city’s more than three-year slog to restructure its debts, reduce benefits to retirees and emerge from one of the largest municipal bankruptcies in more than a decade.

Once McManus signs an order approving the plan of adjustment, it will be formally approved.

Vallejo, a city of 120,000, filed for bankruptcy in May 2008 due to dwindling tax collections and what it called unsustainable labor contracts. It is the largest municipal bankruptcy in California — and one of the biggest in the country — since Orange County in 1994.

The debt reorganization plan is part of a five-year road map approved by the City Council. It tackles $195 million in unfunded pension obligations, cuts payments for retiree health care, reduces pension benefits for new employees, raises pension contributions from current workers, and creates a rainy-day fund.

Under the final plan, general unsecured creditor claims — those without collateral — will be paid out of a pool of $5.9 million. The mostly union members and retirees would get around a quarter or less or their original claims.

Many of the general unsecured claims stem from the city’s rejection of collective bargaining agreements with unions during the move to bankruptcy. Vallejo received 969 general unsecured claims totaling $262 million.

Earlier in the year, the city reached tentative agreements with bondholder Union Bank, the owner of $45 million of certificates of participation, and National Public Finance Guarantee Corp., the insurer of a small share of the bonds. Those agreements will be confirmed along with the plan.

Union Bank will take a 47% haircut on four series of COPs.

According to the city’s agreement with National, part of the debt payments would be deferred a year and interest payments on the deferred amount will be set at a rate of 5.25%, which would be 1% to 2% less than the original rate.

Vallejo’s plan leaves debt backed by specific revenues untouched.

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