Stockton set to become the largest US city to declare bankruptcy STOCKTON, Calif. - Officials in Stockton said Tuesday that mediation with creditors has failed, meaning the city is set to become the largest American city ever to declare bankruptcy. City Manager Bob Deis said officials were unable to reach a deal to restructure hundreds of millions of dollars of debt under a new state law designed to help municipalities avoid bankruptcy. Monday marked the three-month deadline for negotiations. "Unfortunately we have no comprehensive set of agreements with our creditors that would eliminate the deficit and avoid insolvency," Deis said at a City Council meeting. He said, however, that the city was still negotiating with some creditors and could reach deals with as many as one-third of them. We think Chapter 9 protection is the only choice left. If we get any agreements, those will be honored in Chapter 9," Deis said. The Council was expected to vote later on a special bankruptcy budget to plug next year's anticipated $26 million deficit. The budget is expected to suspend debt payments, reduce payments for retiree medical benefits and increase revenue through code enforcement and parking citations, among other steps. City lawyers could file for Chapter 9 protection in court as soon as Wednesday. The river port city of 290,000 in Central California has seen its property taxes and other revenues decline, while expensive investments and generous retiree benefits drained city coffers. To plug next year's anticipated $26 million budget shortfall, a proposed budget to be considered Tuesday night would suspend payments for debts and legal claims, reduce payments for retiree medical benefits, further cut some pay and benefits, and increase revenue through code enforcement and parking citations. The proposed budget includes no major service reductions, Deis said earlier. "The whole purpose of filing Chapter 9 is to avoid an uncontrolled chaotic situation," he said. City officials say the city has run out of options. In addition, expensive city investments -- a promenade, sports arena and hotel -- failed to produce an economic boon. Under a bankruptcy filing, officials would retain power over day-to-day city operations and staffing, but a judge would take over all decisions concerning the city's debts, said Robert Benedetti, professor of political science at the University of the Pacific in Stockton. "One of the reasons a city might want to go the bankruptcy route is that they don't want a situation where they have to pay out debts and have to close the police or fire department," Benedetti said. Stockton's bankruptcy would make it the largest city by population to file for Chapter 9 protection, according to Jim Spiotto, a Chicago bankruptcy lawyer who tracks such cases. He said Bridgeport, Conn., was the largest city to file for bankruptcy, which it did in 1991, followed by Vallejo, Calif., which filed in 2008. Jefferson County in Alabama is the largest local government bankruptcy filing to date in terms of the size of its debt. It occurred in November 2011 and was followed by Orange County, Calif., in 1994. Stockton was the first city to test a new state mediation law, Assembly Bill 506, which is less than 6 months old. Stockton officials have said that even with a bankruptcy, they are optimistic.