Stockton, a northern California city of nearly 300,000, was poised to become the largest U.S. city to declare bankruptcy by approving a budget that requests protection from creditors.
After three months of talks to avert the bankruptcy concluded at midnight on Monday without results, Stockton's city council was scheduled to meet on Tuesday evening to vote on the new budget. The city manager could file for Chapter 9 as soon as Wednesday.
The council was widely expected to endorse the plan, said Dwane Milnes, who represented retired city employees in the talks: "It will be at least a 6-1 vote."
"Every signal in the universe points to them filing for bankruptcy either Wednesday or Thursday," he said.
Stockton, which has more than $700 million in debt, had been in confidential mediation with 18 creditors, seeking concessions to help fill a $26 million shortfall for the fiscal year beginning on July 1.
The mediation was part of a restructuring plan for the city's battered finances unveiled in February. Representatives for some creditors said a sense of pessimism hung over the talks given their complexity and the scale of Stockton's financial troubles.
Stockton's predicament stems from years of fiscal mismanagement, too much debt taken on in good times and generous pay and benefits for city employees and retirees.
Stockton has suffered a plunge in revenue with the collapse of its once red-hot housing market, which transformed the city, traditionally a business center in California's farm-rich Central Valley, into a distant bedroom community for the San Francisco Bay area.
Stockton has been unable to keep its budget balanced despite cutting more than $90 million in spending in recent years along with a quarter of all its employees, including a quarter of its police officers - a concern for the city's residents who are facing a surge in violent crime.
If Stockton, 85 miles (about 135 km) east of San Francisco, files for bankruptcy, it would be the largest U.S. city to have ever done so, setting a landmark for the U.S. municipal debt market.
Because municipal bankruptcies under Chapter 9 of the federal bankruptcy code are rare, especially for larger cities, Stockton could set important precedents on how various different types of creditors are treated in such cases.
In the past, large cities like Harrisburg Pennsylvania or Bridgeport, Connecticut have seen the filing of bankruptcy protection rejected by the court.
In the most recent case in October 2011, the filing by Harrisburg, a city of nearly 50,000, was rejected because a state law prohibited municipalities of a certain size from seeking legal protection from creditors.
In California, lawyers representing Stockton also worked for Vallejo, California when it filed for bankruptcy in 2008. The former Navy town emerged last year from bankruptcy with sharply reduced payments for its retiree medical program.
Stockton officials have been considering bankruptcy since February and with the budget plan before them, also known as a tendency plan, they are prepared to take drastic action to plug their budget gap.
The plan proposes suspending $10.2 million in debt payments, a move likely to trigger further downgrades of the city by ratings agencies.
Under the restructuring plan approved by its city council in February, Stockton has already defaulted on about $2 million in debt, allowing the trustee for one of its bond insurers to seize a building once slated to be its future city hall and three parking garages.
The intentional default and of bankruptcy prompted Moody's Investors Service and Standard & Poor's Ratings Services to drop their credit ratings on Stockton.
Moody's has its issuer rating for Stockton at a junk level Ba2 from Baa1 while S&P has its issuer rating on the city from BB to SD, one notch above its D default rating. More rating downgrades could be triggered by the bankruptcy filing.
S&P analyst Chris Morgan said using of defaults to help tackle Stockton's deficit is worrisome: "It's already quite serious from our perspective."
Stockton's budget plan would also reduce spending on employee compensation and retiree benefits by $11.2 million. About $7 million in savings would come from cutting retiree health care benefits for one year and then phasing them out.
Stockton officials have said the benefits are a crushing expense due to their fast rise and projected liability of $417 million.
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