SAN FRANCISCO —– The bankrupt city of Vallejo, Calif. has so far avoided inflicting severe damage to its bondholders, experts say.

But the municipal market and local governments across the country are still waiting to see whether the city makes any lasting progress in reducing pensions and other liabilities to employees.

“We haven’t had any issuers really file Chapter 9 and we haven’t had any major issuers significantly impair debt on the bond market side, and so Vallejo is being looked at closely,” said James Spiotto, a lawyer with Chapman and Cutler LLP and expert on Chapter 9 bankruptcies, which allow municipalities to restructure debt.

“I think before people draw conclusions as to what some of the unsecured creditors might get [from Vallejo’s bankruptcy], you see the special revenue bonds are paid, you see the lease bonds have reached a compromise, and the vehicle-license bonds have been settled voluntarily,” he said.

Vallejo, a 50-square mile city in the Bay Area with a population of 120,000, filed for bankruptcy in May 2008 in response to what it called unsustainable labor contracts and dwindling tax collections.

Last week, Vallejo’s filed a plan to exit bankruptcy that outlines the reorganization of debt the city owes to its creditors, including its largest: Union Bank and bond insurer National Public Finance Guarantee Corp.

It also sets aside a pool of $6 million to pay unsecured creditors from 5% to 20% of their claims over two years, according to court documents filed in U.S. Bankruptcy Court for the Eastern District in Sacramento.

Vallejo city manager Phil Batchelor said last week Vallejo is near an agreement with Union Bank on repaying the outstanding $45 million worth of certificates of participation the bank holds.

The city has already reached a tentative settlement with NPFG, which had sued for access to the city’s share of state vehicle-license fees that backed $4.8 million of defaulted 1999 COPs

The bank is slated to get 40% less in restructured and extended payments than what it would have received in the form of a single note. National will be paid interest rates on its debt that is 1% to 2% less compared to the original deal and its payments will also be extended, according to court filings.

Both creditors will also be paid out of the city’s motor-vehicle license fees through a state intercept program that secured the debt.

“To some degree, there has not been an intended harsh result other than what was agreed to by the parties” so far in the Vallejo bankruptcy, Spiotto said.

No other bonds will be affected by the bankruptcy, such as the city’s water revenue bonds.

Spiotto noted that there have been 249 Chapter 9 bankruptcies since 1980, which have mostly been small special-tax ­districts.

Besides Vallejo, the largest in recent history were Orange County in 1994, which paid bondholders in full, and Bridgeport, Conn. in 1991 that ended up pulling out of the bankruptcy filing.

John Hallacy, municipal bond analyst and managing director at Bank of America Merrill Lynch, said in a note Friday that Vallejo’s arrangements are “not completely ideal” but appear to have the right intentions.

“The basic premise is that the city’s intent is to pay as much of its debt as its finances will allow. Intent is strong and clear; although, the capacity to pay is still significantly diminished,” he said, noting that debt service for water and sewer bonds and those tied to special tax districts have been fully covered.

Hallacy also pointed out that the city is so far honoring collective bargaining agreements with unions and making all pension and workers’ compensation ­payments.

Batchelor said during a news conference last week that the city is eying reductions to employee benefits, including pensions.

Howard Cure, director of municipal research at Evercore Wealth Management, said he is wondering how other cities will interpret Vallejo’s treatment of the unions and benefits as it exits bankruptcy.

“I personally wonder for cities with bad labor relations that can’t get concessions in an era where the state is not going to be around to subsidize a lot of the functions,” he said. “Will other cities resort to this, or was this a warning that it is a very difficult process and are unionized employees willing to make concessions to avoid this?”

Batchelor has already given his advice to cities who may be considering bankruptcy. “I would not recommend bankruptcy to anyone,” he said.

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