Stockton, Cal., to become the largest city to file for bankruptcy in America

Stockton, Cal., is about to become the nation’s largest city to file for bankruptcy under U.S. code.

Stockton is facing a $26 million budget shortfall and hasn’t been able to square its debts through state-required mediation. Now the city of 290,000 will swallow its pride and apply for Chapter 9 bankruptcy.

“Unfortunately, it’s the equivalent of cutting off your arm to save the rest of the body,” Stockton city manager Bob Deis told KGO TV.

The former boomtown is the seventh U.S. municipality to file this year. According to the Associated Press, thirteen cities, counties, and other government entities filed for bankruptcy protection last year — the highest annual level in nearly two decades.

The city was unable to cover its employee medical benefits, make bond payments, or reach a deal with creditors to pay off its deficit.

Since March, Stockton had been in negotiations with its creditors under a new California law requiring mediation before a city can seek protection under the U.S. bankruptcy code.

After a five-hour meeting on Tuesday night, Stockton’s city council voted 6 to 1 to file for bankruptcy. It also voted to adopt a new budget, which proposes eliminating retiree healthcare benefits.

It’s been a slow fall for Stockton, which Forbes ranked as America’s most miserable city in 2010. According to the Associated Press, the city has dealt with $90 million in deficits during the past three years by drastically cutting its police force and fire personnel, even as violent crime is on the uptick and some residents are moving away.

Musician and songwriter Frank Colli is one of Stockton’s beleaguered residents. He’s lived in the city off and on for over fifty years and raised his children there. Now he’s concerned about the growing crime rates and the city’s future.

“More than bankruptcy protection, we need people protection. The crime situation here has continuously escalated from the ‘60s,” Colli said.

According to Colli, Stockton’s location in between Interstate-5 and Highway 99, two of the major vehicle hubs in California, is the reason for the city’s high crime rate. Intelligence analyst Megan Wolfram told Forbes that the city is located on a major drug route from Mexico up the West Coast, which leads to gang competition for turf.

“There’s a lot of great things about the town, the crime situation is just over the top,” Colli said.

The increasing violence and crime has led to the loss of tourists and commuters to Stockton. Residents have left the city as well, partly due to the violence, but more as a result of the economic downturn and the housing market crash. Observers have said Stockton was hit even harder than most other California cities by the recession. The city now has an estimated unemployment rate of 17.5 percent, and the foreclosure rate is one of the highest in the nation. In 2009, 60 Minutes dubbed Stockton “the foreclosure capital”.

More than anything, the bankruptcy is expected to hurt city employees and retirees the most.

According to Reuters, Stockton never set aside funds for retirees’ healthcare, so it has had no protection as medical costs have soared.

Fewer than half of the 2,400 retirees receive medical benefits and Stockton officials say the city faces a liability for its retiree medical program of $417 million.

Stockton is expected to file with the court by Friday.