SAN FRANCISCO - A federal bankruptcy court on Tuesday allowed Vallejo, Calif., to reject the last of four labor contracts that bankrupted the San Francisco Bay Area city.

Michael McManus, chief judge of U.S. Bankruptcy Court for the Eastern District of California, approved they city's motion to reject its collective bargaining agreement with the International Brotherhood of Electrical Workers. The IBEW represents frontline non-public safety workers.

"Given the state of the city's financial situation, the city cannot afford the IBEW CBA," McManus said in a 28-page ruling published Tuesday afternoon. "Absent rejection of the IBEW CBA, it is unlikely that the city will be able to implement a viable plan of adjustment and emerge from bankruptcy."

Vallejo, a city of 117,000 people, sought Chapter 9 bankruptcy protection in May 2008 after months of negotiations to reduce labor costs, which eat up about three-quarters of its shrinking general fund. The city has been hard hit by the recession, with development halted, foreclosure rates consistently among the top 10 in the country, and several major retailers closing shop.

City officials hailed the ruling and said it would help lead to the end of a bankruptcy case that's cost millions for both sides and driven a deep wedge between the working-class community and its public servants.

"The city is pleased with the judge's ruling, as it will permit the city to focus its efforts and resources on the development of a plan of adjustment that will enable the city to achieve long-term financial stability and to successfully emerge from bankruptcy," spokeswoman Joann West said in a statement.

Vallejo has been paying workers less than their contracted rates under the protection of the bankruptcy court since June 2008. Vallejo reached new, cheaper labor contracts with police and management employees in January, but it has yet to agree to new contracts with the IBEW and the International Association of Firefighters.

McManus ruled in March that the bankruptcy court had the power to approve the city's motion to reject a collective bargaining agreement, but he pushed the city, the IBEW, and the firefighters to negotiate a solution that didn't require rejection of the labor contracts. He forced the unions and the city into mediation with Bankruptcy Judge Elizabeth Perris of Portland, Ore., for about five months.

The firefighters agreed last month to throw out their contracts and begin an expedited schedule of negotiations that will either yield a new contract agreement or a contract that is imposed in binding arbitration within several months.

The IBEW, which represents the city's lowest-paid workers, was the only union to leave its contract in the hands of the judge.

Among other things, its lawyers argued that its workers aren't overpaid, that the city's lowest-paid workers were being asked to take deeper cuts than other creditors and workers, and that much of the IBEW salaries are paid by funds that aren't bankrupt. Only Vallejo's general fund is bankrupt.

McManus rejected those arguments, subjecting the city's motion to reject the CBA to a three-part test defined in a 1984 U.S. Supreme Court ruling, National Labor Relations Board v. Bildisco & Bildisco.

The judge said the Bildisco standard required the city to prove that the contract was burdensome; rejection of the contract was fair to all the parties of the bankruptcy; and the parties had tried to negotiate a solution and were unlikely to reach an agreement voluntarily.

McManus said in his ruling that the city had largely proven its case for rejection of its labor contract when it established that it was eligible for bankruptcy. The city's insolvency, its attempts to negotiate a solution outside of bankruptcy and the predominance of labor costs in the municipal budget were all proven early in the case, he said.

Despite the union's argument that its workers are the lowest-paid city employees, McManus also ruled that the IBEW's contracts were burdensome.

He said the union's own salary survey showed that its workers are being paid "mid-market" salaries under the reduced bankruptcy payment plan. He concluded that meant that IBEW workers would be making above-market wages if its contract were maintained. The contract, which required raises of 3.2% in fiscal 2008-09 and 3% to 5% in fiscal 2009-10, was scheduled to expire at the end of June 2010.

On the fairness of rejecting the contracts, McManus noted that all of the city's other unions had agreed to renegotiate. He said the city had also imposed similar reductions in interest payments to holders of about $50 million of Vallejo certificates of participation.

"The city is not unfairly targeting IBEW while leaving other creditors unimpaired," he wrote.

The IBEW is represented by Farella Braun + Martel LLP. The city is represented by Orrick, Herrington & Sutcliffe LLP.

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