SAN FRANCISCO — Vallejo, Calif., City Council members will weigh a plan to emerge from bankruptcy later this month, but the city is still likely more than half a year away from exiting the largest municipal bankruptcy in more than a decade.

Newly hired interim city manager Phil Batchelor, the third city manager since Vallejo filed for bankruptcy, will present a long-term budget strategy to the council on Nov. 16, according to city's finance department.

The seven council members would then need to adopt the proposal that would be worked into a final version to be presented to the bankruptcy court.

"The real guts of any plan, whether Chapter 9 or 11, is the budget — where is the money going to go," said Marc Levinson, an attorney who represents Vallejo for Orrick, Herrington & Sutcliffe LLP. "We have to have a plan on file by Jan. 18 and we are going to shoot for Dec. 21."

Levinson said it could take until early summer before the city gets the bankruptcy plan approved by U.S. Bankruptcy Judge Michael McManus in Sacramento.

"Optimistically, realistically, we are talking about sometime in June [for the bankruptcy plan approval]. That is roughly the timetable," Levinson said.

The Northern California 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 U.S. history since Orange County, Calif., filed in 1994

In the years leading up to the city's filing, expenses were growing 11% a year while revenues were only growing 3%. Costs to pay police and firemen, which represented 74% of t spending, overwhelmed Vallejo's $85.3 million general fund budget.

Vallejo has tried to renegotiate its labor contracts with its four unions, but the talks are still incomplete.

Even as the city gets closer to an end point, it still faces legal trouble.

Vallejo is battling in bankruptcy court with bond insurer National Public Finance Guarantee Corp. over $4.8 million in certificates of participation the city sold in 1999.

NPFG recently filed a new complaint in the case in an effort to claim fees given to the city from California that the insurer argues backed the certificates it insures before Vallejo defaulted on its debt payments.

Last month, the insurer withdrew a similar motion after McManus indicated he would deny it on procedural grounds.

"We are simply asking the court to ensure that investors receive what was promised when the bonds were issued," said NPFG's spokesman Kevin Brown.

Vallejo has taken the position that the vehicle license fees from the state still belong to the city because of the Chapter 9 bankruptcy filing.

Levinson said the two sides are talking but have been unable to come to a compromise.

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

The deal carried insurance by MBIA Insurance Corp., as well as a debt-service reserve surety bond from National.

NPFG is a public finance insurance subsidiary of MBIA. It has had to pay $204,408 as draws on the surety bond and expects to pay substantial additional claims, according to court documents.

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