SACRAMENTO – A bankruptcy judge heard evidence Wednesday in a hearing to decide whether the financially struggling city of Vallejo can move ahead with its case and ultimately void labor contracts with four public employees unions.

Attorneys representing the city and the unions for police, fire and other public employees presented opening statements at a hearing that will help U.S. Bankruptcy Judge Michael McManus determine if Vallejo is financially insolvent, and thus able to proceed with its Chapter 9 case.

City leaders voted to file for bankruptcy in May, citing declining tax revenues linked to the high number of foreclosures in the city. The city also blamed out-of-control labor costs, which they blamed on poor decision making by previous city councilmembers.

In June, city leaders asked the judge to void all four of its labor contracts, which covers 400 public employees.

Vallejo, a city of 120,000 people located about 33 miles northeast of San Francisco, faces a budget shortfall of $16 million. Solano County, where Vallejo is located, has one of the nation's highest foreclosure rates.

On Wednesday, the city's bankruptcy attorney, Marc Levinson, said under its current labor agreements the city would only be able to pay its bills through 2010.

Thereafter, Levinson said the city would be operating in the red, and be unable to pay its payroll. If the city was not able to gain bankruptcy protection now, Levinson argued, it would be back year after year because it would be unable to stay afloat financially.

“There would be no alternative to bankruptcy other than chaos,” Levinson said, flanked by seven other attorneys representing creditors and banks to whom the city owes money.

The city's police, fire and other city workers have argued that the city's decision to file for bankruptcy was merely a ploy to void its union contracts.

Dean Gloster, the unions' attorney, argued that by granting bankruptcy to Vallejo the judge would open the door to hundreds of other cities in the state to do the same thing.

Gloster said Vallejo's city leaders had practiced “creative accounting” to deplete its general fund, and that the city was not actually insolvent.

Gloster argued that Vallejo's bankruptcy case was simply “political theater” its city leaders were using to sway public opinion against the unions.

“We don't have an insolvency problem here, we have an accountability problem,” he said.

Gloster said if the city “wins” and the union's contracts are voided, Vallejo would still be required to spend millions in attorneys fees to arbitrate the details of new agreements with police officers, firefighters and others.

If the McManus does decide to void Vallejo's labor agreements, the decision could set a precedent for how cities and labor unions enter into collective bargaining agreements in the future.

Orange County filed for bankruptcy in 1994 after it lost money in a series of bad investments; the Southern California town of Desert Hot Springs declared bankruptcy in 2001 after losing a lawsuit.

Mayor Osby Davis and other members of the City Council attending the hearings Wednesday said they did not wish to comment while the case was being heard.

The hearings are scheduled to continue Thursday and Friday. The judge can issue his ruling from the bench or in writing.