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California city faces bankruptcy

Stockton, the California city with the nation's second-highest foreclosure rate, is facing a moment of decision on whether to become the biggest city to file for bankruptcy, as a deadline for talks between the city and its creditors approached late today.

City officials are still hoping to reach a deal that would restructure millions of dollars of debt under a new state mediation law designed to help municipalities avoid bankruptcy, City Manager Bob Deis said.

Some nights, negotiations with the 18 creditors have stretched past midnight and remain confidential. But Deis said that to avoid bankruptcy, any deal would have to result in sufficient savings to make the city solvent.

Meantime, officials have made preparations in case mediation efforts fail. The Stockton City Council is scheduled to decide Tuesday whether to adopt a special budget, which would cover the city's projected $26 million deficit in case of a bankruptcy declaration.

California cities are required by law to adopt a balanced budget by July 1 of each year.

If mediation fails and Council members adopt the special budget, Stockton's lawyers could file for Chapter 9 protection in court as early as Wednesday, Deis said.

City officials say this river port city of 290,000 in the Central Valley has run out of options. In recent years, thousands of new homes mushroomed in Stockton, part of a suburban housing boom that attracted buyers from the San Francisco Bay Area.

When the economy crashed and the construction bubble burst, Stockton was battered by foreclosures and lost income from property taxes and other fees.

The city also has one of the highest crime and unemployment rates. It has twice topped Forbes magazine's list of "America's most miserable cities."

To plug next year's $26 million budget hole, the proposed budget suspends debt payments and payments for legal claims; reduces payments for retiree medical benefits; further reduces some pay and benefits and increases revenue through code enforcement and parking citations.

If the city files for bankruptcy, it will still have to work out a court agreement with creditors on how to pay them upon exiting bankruptcy.