SAN FRANCISCO — Vallejo, Calif., is on track to submit a plan to a federal judge next week to exit the largest municipal bankruptcy in more than a decade.

Marc Levinson, the city’s bankruptcy lawyer from Orrick, Herrington & Sutcliffe LLP, said in an interview that the Chapter 9 exit strategy is slated to be submitted to Judge Michael McManus in U.S. Bankruptcy Court for the Eastern District in Sacramento on the court’s Jan. 18 deadline.

The formal exit proposal will outline how to pay debt and creditor claims. It will also start a long legal process and wrangling that will likely end sometime in the summer with final approval of the plan by McManus.

City Council members approved a five-year road map at the end of November that laid the foundation for the legal plan, tackling $195 million in unfunded city pension obligations, cutting payments for retiree health care, reducing pension benefits for new employees, raising pension contributions for current workers, and creating a rainy-day fund.

Vallejo, which has a population of around 120,000 residents, filed for bankruptcy in response to unsustainable labor contracts and dwindling tax collections, representing the largest municipal bankruptcy in California since Orange County filed in 1994.

The plan approved by the City Council would pay unsecured creditors, many of whom are employees and retirees, from a pool of $5 million and suspend debt-service payments for three years. The city’s general fund secures about $50 million of debt.

Union Bank of California, which provided the letter of credit on Vallejo’s defaulted debt, is owed more than $20 million from general fund obligations and is owed a total of around $50 million by the city, while insurer National Public Finance Guarantee Corp. is owed about $5 million.

The bankruptcy filing affected $53 million of debt backed by the city’s general fund, including certificates of participation sold in 1999.

The deal carried insurance and a debt-service reserve surety bond from MBIA Insurance Corp., now operating through its subsidiary NPFG.

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.

The California State Controller’s Office has filed a motion to intervene in the bankruptcy case as it relates to NPFG, saying state intercept funds should be used to protect debt owners.

A hearing on the controller’s motion had been continued to Jan. 18 to give the parties in the case time to reach a settlement, but it may be pushed Feb. 14, according to Levinson.

The National Federation of Municipal Analysts has filed a friend of the court brief in the Vallejo case in support of NPFG, which claims that 34 similar intercept programs in 24 states, supporting billions of dollars of debt issued by municipalities, are potentially at risk of significant downgrades if the motion from NPFG is rejected.

The city’s bankruptcy lawyers have described the NFMA claim as “utterly speculative” and said there is no evidence a denial would devastate California’s municipal credit markets.

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