SAN FRANCISCO — City Council members in Vallejo, Calif., will judge a long-term budget plan Tuesday that outlines a way for the bankrupt city to crawl back into the black.

The proposed five-year plan would tackle $195 million in unfunded pensions and cut health care benefits for retirees across the board, reducing city liabilities by $100 million, raising current employees’ benefit costs, and creating a rainy-day reserve.

The blueprint endorsed by city staff would pay unsecured creditors out of a $5 million pool. Vallejo’s general fund secures about $50 million of debt. The city also plans to suspend debt-service payments for three years.

The 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 filed in 1994.

“It is important that the City Council and community acknowledge the following fiscal and service reality,” city manager Phil Batchelor and finance director Robert Stout wrote in a staff report.

The report noted that general fund revenues have declined 22% to $65 million from $83 million since fiscal 2007-2008, median residential real estate prices in the Vallejo have plummeted 67% since 2006, and sales tax revenue has tumbled 17% the past three years.

Falling revenues and rising employee costs — mainly from public safety — handcuffed the city’s budget and helped precipitate the bankruptcy in May 2008.

Vallejo has cut police and fire jobs by more than 40% since 2003, according to the report. Employee salaries and benefits account for 80% of the city’s gross general fund spending.

“Current public safety and other service levels have been reduced so dramatically that there are very few dollars available to provide for repayment to creditors without further compromising the continued operations of city services or jeopardizing the safety of the citizens of Vallejo,” the report said.

Even with the massive cuts, labor costs are expected to rise more than $780,000 in fiscal 2010-2011 from the adopted budget, according to a separate staff report on budget changes that are proposed for council approval along with the plan. The report also noted that the city has so far spent $9 million on bankruptcy costs, with $7 million coming from its debt service funds.

During the meeting, the council will also consider a new contract with the International Brotherhood of Electrical Workers, the last of the city’s unions to agree to concessions since bankruptcy. The IBEW wrangled with the city for more than two years before its members voted earlier this month to accept a new agreement similar to those signed by other city unions. The contract, which would save the city $3.3 million, retains a 10% wage cut and increases employee benefit costs.

If the long-term budget plan is passed, the city is expected to file a proposal before mid-January to specify its adjustments to debt and creditor claims for the bankruptcy court.

City bankruptcy lawyer Marc Levinson from Orrick, Herrington & Sutcliffe has said it could take until early summer before the plan is approved because of the many legal hurdles ahead.

The bankruptcy judge is Michael McManus in Sacramento.

The bankruptcy filing affected $53 million of debt backed by the city’s general fund, including certificates of participation 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 Guarantee Corp..

Vallejo is battling in bankruptcy court with NPFG over the $4.8 million of COPs. The insurer wants access to the state vehicle license fees given to the city that allegedly backed the certificates.

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