SAN FRANCISCO — Vallejo City Council members are weighing a contentious budget plan as the California city struggles to emerge from Chapter 9 bankruptcy.

The proposed five-year spending plan presented to the council Tuesday night assumes the city would hold off paying its bondholders until fiscal 2013, with unsecured creditors being paid out of a $5 million pool.

Vallejo’s general fund secures about $50 million of debt. The city has stopped paying bondholders and is in negotiations with debt holders.

The proposed budget would help the city tackle $195 million in unfunded pensions and would cut health care benefits for retirees across the board to $300 a month, which would reduce the city’s liabilities by $100 million, and raise current employees’ benefit costs. The plan also calls for establishment of a rainy-day fund.

The San Francisco Bay Area city filed for Chapter 9 bankruptcy protection in May 2008 amid what it said were unsustainable labor contracts and dwindling tax collections. It was the largest municipal bankruptcy in the state since Orange County, Calif., filed in 1994.

“The harsh reality is that this is a tough plan and we will have significant opposition,” Marc Levinson, the city’s bankruptcy lawyer from Orrick, Herrington & Sutcliffe LLP, told the City Council.

If some creditors decline the plan, he said Vallejo may have to go with a “cram-down plan” that forces a non-consenting class of creditors to accept the proposal.

“We are expecting that we will get a cram-down plan and that we will get it confirmed,” Levinson said.

Vallejo has received more than 1,000 claims from creditors that are being sorted into categories. The largest category is employees and retirees.

The City Council will consider adopting the financial plan at a meeting on Nov. 30. If approved, the proposal must be submitted to bankruptcy court by Jan. 18.

Because of the many legal hurdles, Levinson said it could take until early summer before the plan is approved by U.S. Bankruptcy Judge Michael McManus in Sacramento.

Vallejo is also battling in bankruptcy court with bond insurer National Public Finance Guarantee Corp. over $4.8 million of certificates of participation the city sold in 1999.

NPFG recently filed a new complaint in the case in a bid to claim fees the state gave Vallejo that the insurer argues backed the certificates it insured before Vallejo defaulted on its debt.

Vallejo has taken the position that the vehicle-license fees from California still belong to the city because of the Chapter 9 bankruptcy filing.

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

During the presentation, newly hired interim city manager Phil Batchelor, the third city manager since Vallejo filed for bankruptcy, presented the sobering financial position to council members.

“The situation that we find ourselves in is very bleak,” Batchelor said during the presentation.

The city expects revenues to grow 4% to $68.2 million in fiscal 2015 from $65.5 million in fiscal 2012, while spending will rise almost 2% to $67.6 million in 2015 from $66.4 in fiscal 2012.

Since filing for bankruptcy, Vallejo has slashed its spending 27% to $63.42 million this fiscal year from $87.34 million in fiscal 2007.

Meanwhile, its revenues have fallen 24% to $63.42 million this year from $83.63 million in fiscal 2007.

“Now I think we are at a point were we can stabilize and move in a positive direction,” said Mayor Osby Davis. “There is a lot more to do; there is going to be a lot more pain.”

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