SACRAMENTO - Unions representing public employees in Vallejo, Calif., asked a judge to dismiss the city's Chapter 9 bankruptcy case Friday, arguing that Vallejo can afford to pay its bills.

"Vallejo is not eligible to file for, and remain in, bankruptcy and did not file its bankruptcy petition in good faith," wrote union attorney Dean M. Gloster of Farella Braun+Martel LLP in San Francisco in a filing. "The petition should therefore be dismissed."

Vallejo in May became the biggest municipality to seek bankruptcy protection since Orange County in 1994, arguing that it could not find a way to fill a projected $17 million deficit for next year. The San Francisco Bay-area city last month asked the federal bankruptcy court in Sacramento for permission to reject its collective bargaining agreements.

On Friday, the city's unions struck back in court for the first time, arguing that they had offered the city more than $10 million in contract concessions and hired outside reputable accountants who contended that the city had enough money to meet its contractual obligations to employees, bondholders, and other creditors.

The city has about $53.5 million of general-fund backed certificates of participation outstanding. Neither Wells Fargo & Co. nor Union Bank of California - the trustees on the outstanding debt - contested the bankruptcy filing. The city continues to make its payments to bondholders, but Vallejo said in a court filing last month that it would cap interest rate payments on its $49.9 million of variable-rate COPs at 6%. It continues to negotiate a settlement of that issue with Union Bank, the letter of credit provider on the debt.

Vallejo last month also asked Judge Michael S. McManus, chief judge of the U.S. Bankruptcy Court for the Eastern District of California, to allow it to reject its union contracts.

Three unions - the International Association of Firefighters, Vallejo Police Officers Association, and the International Brotherhood of Electrical Workers - represent most city workers, and they have banded together to fight the bankruptcy filing.

"The city is not insolvent," the unions argued in their court filings. "The city was current on all its debts at the filing of the petition, is still making current interest and principal payments to bondholders and has numerous options for raising new revenue and cutting expenditures."

They said Vallejo could balance its budget and "amass millions of dollars" in reserves through a combination of concessions already offered by workers, sale of unused city land, cost cuts, inter-fund transfers, and discretionary fee increases.

The union supported its claims with statements by a local real-estate agent, Fred Sessler, who studied the city's land holdings and found at least $2.6 million of unused property on Vallejo's books.

Workers also submitted a statement from Roger Mialocq, a principal with Harvey M. Rose Associates LLC, one of the state's leading financial accounting firms for local governments. The firm also serves as the independent budget analyst for the San Francisco Board of Supervisors.

"If the city were to implement modest and prudent spending reductions, it could reduce its projected expenditures by at least $10 million," Mialocq said in his statement. That's in addition to any labor concessions offered by the unions, he said, adding that he also found at least $11.4 million in possible revenue increases for the city's general fund.

McManus on Friday agreed to hear city and union arguments on the validity of the bankruptcy filing on July 23.

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