SAN FRANCISCO — The Stockton City Council will decide next week whether to give its city manager the power to declare bankruptcy if it is unable to get enough concessions from creditors before the end of June.

The council will consider a resolution Tuesday that would allow it to file for protection under Chapter 9 of the federal bankruptcy code if its current mediation with creditors is unable to restructure its debts enough to prevent insolvency for the fiscal year starting July 1.

“We remain hopeful that we can reach an agreement with a sufficient number of our creditors to get our fiscal house in order,” Mayor Ann Johnston said in a statement late Wednesday. “Without significant fiscal relief, the general fund will be out of money by June 30, 2012.”

If it moves ahead, Stockton could become the largest city in the country ever to file for bankruptcy.

The City Council decided on Feb. 28 to enter into deliberations with creditors under a new state law, AB 506, that requires muncipalities to hold the mediations prior to filing for Chapter 9 protection.

In an effort to stave off insolvency, Stockton has already caused three sets of lease revenue bonds to default after the city decided in February to stop paying its part 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 been slated to become the next city hall.

Stockton lost a court case on Tuesday to Wells Fargo, the trustee of $40 million of bonds sold in 2007 that are backed by lease revenues from the building. That followed the city’s loss in April of the garages tied to $32 million of lease revenue bonds after it lost a similar court case.

The city had more than $702 million of bonds outstanding as of the end of June 2010, including debt issued for restricted enterprise funds such as water, sewer and parking enterprise debt, according to financial statements.

The bonds, backed by restricted funds and formerly by the city’s redevelopment agency, should remain unaffected if the city files for bankruptcy, according to a filing to the Municipal Securities Rulemaking Board’s online EMMA system by deputy city manager Laurie Montes.

However, the filing said a $55 million series of variable-rate revenue bonds issued in 2010 by the city’s financing authority could cause Union Bank, the letter-of-credit provider on the debt, to declare an event of default, resulting in a mandatory tender. Stockton officials noted that the bankruptcy court could deem the default unenforceable.

The statement also said the city’s general fund backs its RDA’s $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 RDA following the dissolution of all of the agencies by a new state law last year.

In his report to council, city manager Bob Deis said Stockton will be cash insolvent by July 1. “If the AB 506 mediation process is unsuccessful, Chapter 9 will be required because the city will not be able to meet its obligations,” he said. “The city is clearly insolvent.”

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

According to the state constitution and Stockton’s charter, it must pass a balanced budget by the end of June.

The city manager said Stockton’s current debts prevent it from balancing its budget unless more staff cuts are made that would “severely impair the health and safety of the community.”

Stockton’s finances are also being poured over by five teams of auditors from the California controller’s office as well by another team of independent auditors. Deis said no undiscovered or undisclosed pool of resources would be found to address the city’s structural deficit.

He also noted that accounting errors over many years had overstated the general fund by $3.8 million. 

A city of 300,000 residents, Stockton has struggled with its budget for years since tax collections tumbled due to the housing bust and recession. It has the worst foreclosure rate in the country. Median home prices have fallen to $118,500 in February from $407 million in December 2005.

The city’s unemployment rate is 19.9%.

In addition to the economic problems, Stockton handed out rich retirement benefits to city employees and incurred large debts to fund a myriad of new facilities, including a downtown improvement project with an events center and a new city hall.

City officials expect retiree health care costs to increase by 115% over the next 10 years, and pension costs by 94%.

Debt service paid out of Stockton’s general fund has increased nearly six-fold to a projected $17 million in fiscal 2013 from $3 million in fiscal 2007, according to the staff report.

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