VALLEJO — The Vallejo City Council unanimously approved a financial blueprint Tuesday night to exit California’s largest municipal bankruptcy in more than a decade.

The five-year road map tackles $195 million in unfunded city pension obligations, cuts payments for retiree health care, reduces pension benefits for new employees, raises pension contributions for current workers, and creates a rainy-day fund.

“This five-year plan looks out and says, basically, we will be treading water for five years,” interim city manager Phil Batchelor told the council. He is Vallejo’s third manager since the San Francisco Bay Area city filed for Chapter 9 bankruptcy protection in May 2008.

The council approval starts the city on a long legal path that begins with submitting a formal exit proposal outlining how to pay debt and creditor claims to the U.S. bankruptcy court in Sacramento by mid-January. That journey will likely end sometime in the ­summer with approval from Judge Michael McManus.

Vallejo, which has a population of around 120,000 residents, filed for bankruptcy in response to what it said were unsustainable labor contracts and dwindling tax collections. That move represents the largest municipal bankruptcy in the state since Orange County filed in 1994.

“This is a reality plan,” Mayor Osby Davis said. “Whether you like it or not, this is what it is.”

The proposed plan would pay unsecured creditors, many of whom are employees and retirees, from a pool of $5 million and suspend debt-service payments for three years. The city’s general fund secures about $50 million of debt.

“In a sense ... the city doesn’t really care if there are $50 million or $30 million [in creditor claims] because we are spending $5 million no matter what,” the city’s bankruptcy lawyer, Marc Levinson from ­Orrick, Herrington & Sutcliffe, said during an interview after the meeting.

Union Bank of California, which provided the letter of credit on Vallejo’s defaulted debt, is owed more than $20 million from general fund obligations and is owed a total of around $50 million by the city, while insurer National Public Finance Guarantee is owed about $5 million, according to Levinson.

The bankruptcy filing affected $53 million of debt backed by the city’s general fund, including certificates of participation sold in 1999. The deal carried insurance and a debt-service reserve surety bond from MBIA Insurance Corp., now operating as National Public Finance Guarantee Corp.

Vallejo is battling in bankruptcy court with NPFG over the $4.8 million of COPs. The insurer wants access to the state vehicle-license fees given to the city that allegedly backed the certificates.

Because unsecured creditors are likely to be paid so little, Levinson said, there is likely a looming battle between unsecured and secured creditors on the horizon.

“The unsecureds may go after the secured creditors,” he said. “That is the way it always works in Chapter 11 and that is the way it is going to work in Chapter 9.”

He also said he expects a “cram-down plan,” which happens when one group of creditors does not agree with a final proposal and the court forces the plan.

The plan could be altered in the future if changes are needed to accommodate the court or negotiations, according to Levinson, although any major changes need City Council approval.

The council also accepted a new contract with the International Brotherhood of Electrical Workers during the meeting Tuesday. The IBEW is the last of the city unions to agree to concessions since bankruptcy.

The IBEW wrangled with the city for more than two years before its members voted earlier this month to accept a new agreement similar to those previously signed by other city unions. The contract, which would save the city $3.3 million, adds a 5% wage cut.

Vallejo has already cut police and fire jobs, its largest expenditure, by more than 40% since 2003. Employee salaries and benefits account for 80% of gross general fund spending.

General fund revenues have declined 22% to $65 million from $83 million since fiscal 2007-2008, median residential real estate prices in Vallejo have plummeted 67% since 2006, and sales tax revenue has tumbled 17% the past three years, according to staff.

Even with the massive employee cuts, city labor costs are expected to rise more than $780,000 in fiscal 2010-2011 from the adopted budget, according to a separate staff report on budget changes that was also approved along with the plan. The report noted that the city has spent $9 million on bankruptcy costs so far, with $7 million coming from its debt-service funds.

“For the year I have been on the council, it feels like we have been shuffling deck chairs on the Titanic,” council member Marti Brown said.

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