The city council of Vallejo in California late on Tuesday voted unanimously to file for bankruptcy, sparking a downgrade on Wednesday in some of its municipal bonds and prompting fears that other cash-strapped local governments might emulate it.

Vallejo, near San Francisco with a population of 117,000, faces an estimated $16m budget deficit for the fiscal year that starts on July 1. This comes amid a decline in tax revenues related to falling house prices coupled with rising salary and pension costs.