By Jim Christie

SAN FRANCISCO, Feb 21 (Reuters) - Vallejo, California, a former Navy town northeast of San Francisco, may file for bankruptcy because its employee costs are rising too much as its revenues slow, a City Council member said on Thursday.

Officials in the blue-collar town between San Francisco and the state capital of Sacramento expect a $4 million budget surplus to swing to a $6 million shortfall by the end of the fiscal year in June. They anticipate that deficit to widen more next year.

"As of April, we will not have the money to pay employees," Vallejo Councilwoman Stephanie Gomes said in a telephone interview. "It's just projected to get worse and worse.

"If we can't get all the pieces to come together ... then the city should declare bankruptcy," Gomes said.

Vallejo's revenues are down as California's economy slows.

But Gomes said the city is most burdened by rising payroll and retirement costs for its emergency personnel -- concerns that many local governments share.

Vallejo officials are now threatening to slash spending widely and follow the example of Desert Hot Springs, California, which filed for bankruptcy in 2001.

That bankruptcy was overshadowed by the most dramatic municipal bankruptcy in the United States -- Orange County, California's mid-1990s meltdown after it lost at least $1.5 billion from bad investments.