SACRAMENTO — Vallejo, Calif., is closing in on settlements with creditors that would smooth its escape from bankruptcy, according to its attorney.
Marc Levinson, the city’s bankruptcy lawyer from Orrick, Herrington & Sutcliffe LLP, told U.S. bankruptcy Judge Michael McManus during a hearing here Monday that negotiations with creditors are “headed in the right direction” and deals could reached before the next hearing at the end of the month.
“The goal is that there will be a number of settlements,” Levinson said. “We won’t know for a while whether that goal will be achieved.”
The next scheduled hearing in the case is set for April 25.
Lawyers representing creditors — which include unions, retirees, bondholders and other unsecured creditors — did not disagree during the hearing.
An early settlement between the city and its creditors would speed up the approval of the city’s bankruptcy exit plan and save money for both sides, mainly in attorney fees.
Vallejo, a San Francisco Bay Area city with a population of 120,000, filed for bankruptcy in May 2008 due to dwindling tax collections and what it called unsustainable labor contracts. The filing represents the largest municipal bankruptcy in California, and one of the biggest in the country, since Orange County’s in 1994.
The city’s lawyers are still wrangling with creditor groups over the wording of the document that explains Vallejo’s plan to exit bankruptcy in simple terms for the creditors so they can vote on the proposal. Both sides appeared Monday to agree on a final version of the document that should be finalized by the next hearing.
Once the document, called a disclosure statement, is approved by McManus, it will be sent to creditors so they may vote on the city’s debt restructuring. When the vote is complete, McManus will hold a hearing to determine the merits of the plan before giving a final approval.
The case is expected to drag into late June or early July.
Also during the hearing, lawyers for retiree creditors requested the specifics of the city’s deal with Union Bank, which holds around $45 million of the city’s debt in the form of certificates of participation.
R. Dale Ginter, the retirees’ lawyer from Downey Brand LLP, said he would examine the deal to see whether it complies with California laws that require some bonds to get voter approval. Vallejo’s certificates, as is typical for COPs, were issued by the city without voter approval.
The city said it will save 47% from its COP restructuring deal with Union Bank. Vallejo officials have estimated a 7.28% variable interest rate over a more than 30-year payment schedule with the bank.
The bank’s debt, along with $4.8 million of COPs insured by National Public Finance Guarantee Corp., make up all of the city’s bond debt linked to the general fund. National has also inked a tentative deal with Vallejo that would reduce and restructure the city’s payments.
The retirees have said the city could save millions by cancelling the Union Bank leases that back the COPs. But Vallejo’s attorneys have argued that a legal fight with the bank may cost millions and could be a lost cause.
According to the proposed plan, unsecured creditors — mostly union members, retirees and general liability claims — would be paid only 5% to 20% of their claims out of a $6 million pool over two years. Some would have access to an insurance pool as well.
Vallejo has received more than a thousand claims, both secured and unsecured, worth almost $500 million, according to city officials.
The bankruptcy exit plan is based on a five-year road map approved by the City Council that tackles $195 million in unfunded pension obligations, cuts payments for retiree health care, reduces pension benefits for new employees, raises pension contributions for current workers, and creates a rainy-day fund.