SAN FRANCISCO - U.S. Bankruptcy Court Judge Michael McManus pushed Vallejo, Calif., and its public employee unions to finalize negotiations on new contracts before he has to decide whether the city can reject its labor agreements.

The judge also said he may force the two sides to go to mediation before ruling on the city's motion, suggesting he'd like to give them every opportunity to settle the case before he rules.

"With or without mediation, you have to agree to something eventually," McManus told lawyers for the city and two public employee unions at a status conference Monday.

Vallejo, a San Francisco Bay Area city of 120,000, last May declared the biggest Chapter 9 bankruptcy since Orange County, Calif., in 1994 claiming it could no longer afford its municipal employee contracts.

McManus ruled in September that the city was eligible for bankruptcy protection and he now must decide on a city motion to reject its employee contracts with two holdout unions. He ruled earlier in the month that the law allows such a rejection, but he didn't say whether Vallejo had met the specific legal criteria for discarding labor agreements.

Two of the city's four unions - which represent the city's police officers and professional employees - have already reached settlements that rewrote their contracts and ended their opposition to the city's bankruptcy.

Two other labor unions - the International Brotherhood of Electrical Workers and the International Association of Firefighters - continue to negotiate with the city, but union and city lawyers disagree about the usefulness of continued negotiations.

"We're not close," said city bankruptcy attorney Marc Levinson of Orrick, Herrington & Sutcliffe LLP.

Levinson is pushing for a ruling on the city's motion to reject the collective bargaining agreements, saying the city and its unions haven't been able to agree despite actively negotiating since September. The two sides also failed to reach an agreement in mediation before the bankruptcy filing.

Union attorney Kelly Woodruff of Farella Braun + Martel LLC was much more sanguine about the prospects for a settlement.

Woodruff said she'd like to continue to negotiate to reach a settlement before the judge rules on the motion to reject the collective bargaining agreements, adding that her clients would like to give mediation - which failed last year before the bankruptcy - another try if the two sides cannot reach an agreement on their own.

"A consensual settlement is in the best interest of all parties at this point," Woodruff said in an interview.

She said the IBEW has agreed to the city's proposal to reduce labor costs, but remains at loggerheads with the city over health care costs. Woodruff said the firefighters union is further from agreement, but the union last week sent the city a proposal that would satisfy all but three city demands, the biggest being reductions in healthcare benefits.

McManus gave the parties at least two more weeks to talk while they work on briefs he demanded. He told the city to explain how labor costs are allocated between the city's general fund - which has filed bankruptcy - and its other funds, which are not part of the bankruptcy.

He told both sides to describe the process - mediation or some other way of negotiating - that will bring them to a settlement.

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