SAN FRANCISCO – The Stockton, Calif. City Council voted Tuesday night to give its city manager the power to file for municipal bankruptcy if mediation talks with creditors prove unsuccessful.

The council voted 6 to 1 to allow City Manager Bob Deis to file for Chapter 9 protection if the mediation sessions conclude June 25 without an agreement.

“We have sat here for four years and have hoped there would be other options. I don’t see any,” said Vice Mayor Kathy Miller during the meeting. “We have been a long time coming to this moment.”

If it moves ahead, Stockton, with more than 300,000 residents, could become the largest city in the country ever to file for bankruptcy.

The mediation sessions, set up under terms of a recent state law designed to discourage bankruptcy filings, will end June 25. The talks were extended 30 days following 60 days of discussions.

“We have hit the wall; we are insolvent,” Mayor Ann Johnston said in a statement.

The state constitution requires cities to adopt a balanced budget by July 1, the start of the fiscal year.

The city said its general fund faces cash insolvency by the end of this fiscal year.

Stockton is facing a $26 million deficit next fiscal year after tackling $90 million of shortfalls over the last three.

The City Council voted on Feb. 28 to enter into deliberations with creditors under last year’s Assembly Bill 506, which strongly encourages municipalities to try mediation prior to filing for Chapter 9 protection.

Stockton has already caused three sets of lease revenue bonds to default following the council’s decision in February to stop payments from the General Fund on $110 million of par value of debt through the end of the fiscal year. Seven bond issues rely in some way on support from the city’s general fund.

As a result of the defaults, the city has lost control of three parking garages and an office building that had once been slated to become the next city hall.

The city had more than $702 million of bonds outstanding, including debt issued for restricted enterprise funds such as water, sewer and parking enterprise debt, according to its last audited financial statement for the year ending June 30, 2010.

The city has said bonds tied to restricted funds, such as utilities, should remain unaffected by a Chapter 9 filing.

Stockton does have a $55 million series of variable-rate revenue bonds issued in 2010 by the Stockton Public Finance Authority, for which letter-of-credit provider Union Bank could declare an event of default. Stockton officials noted that the bankruptcy court could deem the default unenforceable.

The city’s general fund also backs redevelopment agency bonds - $13 million of housing certificates of participation sold in 2003 and $46 million of paper sold in 2004 to fund the events center. The city recently took over as the “successor agency” to the redevelopment agency following the dissolution of all of the agencies by a new state law last year.

Stockton has struggled with its budget for years since tax collections tumbled due to the housing bust and recession. The Stockton region’s unemployment rate tops 15%, according to the Bureau of Labor Statistics.

In addition to its economic problems, Stockton has large employee retirement liabilities and incurred large debts to fund a myriad of new facilities, including a downtown improvement project with a hockey arena, baseball park, and the new city hall.

Stockton has also admitted accounting errors in past years that also contributed to losses. The State Controller’s office is conducting an audit of the city’s finances. Stockton still hasn’t released its audited financials for 2011.

“Poor decisions have been made for over 20 years,” Deis said during the meeting.

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