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Stockton, Calif. Faces Bankruptcy After Mediation with Creditors Fails

David Paul Morris/Bloomberg via Getty Images(STOCKTON, Calif.) -- Stockton, Calif., officials announced Tuesday night that mediation with creditors failed, meaning the city of about 300,000 people is set to become the largest American city to ever declare bankruptcy.

"We think Chapter 9 protection is the only choice left.  If we get any agreements, those will be honored in Chapter 9," City Manager Bob Deis told the City Council.

City lawyers could file for Chapter 9 protection in court as soon as Wednesday.

Vallejo, Calif., with half the population of Stockton, is the largest U.S. city to date to file for bankruptcy.

The benefit of filing for bankruptcy, Stockton officials say, would be to buy time for Stockton to renegotiate its debts on terms more advantageous to the city.  It would remove, at least temporarily, the need for Stockton to make budget cuts even more drastic than those already made.

Stockton, before the bursting of its real estate bubble in 2007, had been riding high.  Between 2000 and 2006, housing prices rose from a median of slightly more than $110,000 to almost $400,000, according to "How Stockton Went Bust," an analysis prepared by California Common Sense (CCS), a nonpartisan, nonprofit group advocating financial transparency.

The city spent generously on projects to rehabilitate and beautify its downtown.  It developed a downtown marina.  It augmented the salary and benefits of city workers.

The generous employment agreements to which the city committed in the mid-2000s, says the CCS report, now comprise the bulk of the city's budget.

"The city now faces more than $800 million in unfunded liabilities for pensions and other retirement benefits," the report notes.

The City Council has addressed about $90 million in deficits in the past three years, in part by eliminating 25 percent of the city's police force, 30 percent of its firefighters, and 43 percent of all other employees, according to a news release issued by the city.

It has sought to boost revenue through fines and parking citations, eliminating payments of bonds, modifications to terms of its labor agreements, and salary and benefit reductions.

Despite such efforts, the city faces a $26 million deficit in the fiscal year that begins on July 1.  California's state constitution requires cities to adopt a balanced budget by July 1 of each year.

Copyright 2012 ABC News Radio

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