SAN FRANCISCO — A federal judge has cleared Vallejo, Calif., to emerge from bankruptcy after three rocky years of Chapter 9 protection.

U.S. Bankruptcy Judge Michael McManus in the Eastern District of California signed the order last week confirming the city’s debt-restructuring plan, which will slash bondholder debt by almost 50% and unsecured claims by 80% or more, according to court documents released Friday.

The judge already gave his verbal approval of the plan during a hearing on July 28 in Sacramento.

Vallejo, a city of 120,000 people, filed for bankruptcy in May 2008 after three years of budget deficits caused by dwindling tax collections and what it called unsustainable labor contracts.

As the largest municipal bankruptcy in California since Orange County’s in 1994, the Vallejo case has been used as an example of the hard slog that comes in those situations. The city has spent more than $9 million on bankruptcy attorneys.

The final plan cements agreements the city made with bondholder Union Bank, the owner of $45 million of certificates of participation, and National Public Finance Guarantee Corp., the insurer of a small share of the bonds.

Union Bank will take a 47% haircut on four series of COPs. Part of Vallejo’s debt payments to National will be deferred a year with an interest rate of 5.25%, which is 1% to 2% below the pre-bankruptcy rate.

Vallejo’s restructuring leaves bonds backed by specific revenues untouched.

Under the final restructuring plan, general unsecured creditor claims — those without collateral — will be paid out of a pool of $5.9 million over two years. The mostly union members and retirees will get paid roughly 5% to 20% of their initial claims.

Many of the general unsecured claims stem from the city’s rejection of collective bargaining agreements with unions during the move to bankruptcy. Police and fire union employee costs make up the majority of the city’s general fund expenses.

Vallejo received more than 900 general unsecured claims, totaling $262 million.

The city’s bankruptcy exit plan is part of a five-year budget blueprint that tackles $195 million in unfunded pension obligations, cuts payments for retiree health care, reduces pension benefits for new employees, raises pension contributions from current workers, and creates a rainy-day fund.

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