SAN FRANCISCO — Stockton, Calif., officials said Monday creditors have agreed to extend talks on how to keep the city out of Chapter 9 bankruptcy.

The mediation process between the troubled city and parties with an interest in its obligations will be extended another 30 days through June 25, after two months of discussions under terms of a recent California law, AB 506, meant to help keep local governments out of bankruptcy court.

“We are doing everything in our power to avoid bankruptcy,” said Mayor Ann Johnston in a statement. “Mediation is our last and best chance to come to an agreement and get the city of Stockton on firm financial footing that will restore services and allow us to become fiscally solvent.”

Confirmed participants in the mediation process include Wells Fargo Bank NA, the trustee for several outstanding bonds, the California Public Employees Retirement System, and bond insurers and liquidity providers.

A city of 300,000 residents, Stockton has struggled after tax collections tumbled due to the housing bust and recession.

As part of its short-term solutions to try to avoid bankruptcy, the city has defaulted on two lease revenue bond issues. One of the defaults led to three parking garages going into a receivership after Stockton lost a court case to trustee Wells Fargo, which sued at the behest of the insurer, National Public Finance Guarantee.

Wells Fargo has said it would seek “remedies” on the other defaulted lease revenue bonds, which are insured by Assured Guaranty Corp. They are tied to an office building that had been slated to become City Hall before the city’s troubles became evident.

The two defaults resulted from the City Council’s vote on Feb. 28 to suspended payments on three bond issues, totaling $110 million in par value, through the end of its fiscal year on June 30.

Stockton is facing a $26 million general fund budget deficit. The city had more than $702 million of bonds outstanding as of June 30, 2010, including city and redevelopment agency bonds and debt issued for restricted enterprise funds such as water, sewer and parking enterprise debt, according to city financial statements.

Moody’s Investors Service downgraded the city’s issuer rating to Ba2 from Baa1 since it announced measures to try to avoid bankruptcy Standard & Poor’s dropped Stockton to “selective default” after successive downgrades from A-minus.

Mammoth Lakes is the only other municipality in California using the AB 506 process to try to prevent bankruptcy.

Lawmakers are considering a new bill that would change the state’s four-month-old law. The proposed legislation, AB 1692, could have a twofold impact. It would extend the powers of mediators in the pre-bankruptcy process, and expand the negotiations to “successor agencies” of the recently eliminated redevelopment agencies to help them deal with debt. It is being considered by the Assembly.

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