Stockton, a city in northern California, next week may decide to suspend payments to some of its creditors and take steps toward a bankruptcy filing after years of fiscal strife.

The city council on Tuesday will consider whether to begin mediation with its creditors, public documents showed. A state law passed last year requires troubled cities in the state to attempt to resolve their financial problems through this type of process before being allowed to file for Chapter 9, the part of the bankruptcy code applicable to cities.

With a population of 292,000, Stockton would be the largest city in at least 30 years to seek bankruptcy protection, according to James Spiotto, a partner at Chapman and Cutler, the law firm.

Moody’s Investors Service on Friday reacted to the proposed city council resolution to suspend debt payments by cutting Stockton’s credit rating by four notches from Baa1 to Ba2, or two notches below investment grade, in a move affecting $341m of debt. It said the city’s rating remained on review pending the city council’s decision.

“The proposed suspension and entry into a mediation process demonstrates significantly reduced willingness, if not ability, to make full and timely debt service payments,” the agency said, while also noting the city’s move to restate last year’s audited financial results.

Stockton is one of a cluster of California cities to struggle in the last few years. The Golden State was at the centre of the housing boom of the last decade and it was particularly hard hit when property values ultimately plummeted and unemployment rose.

Bob Deis, city manager, said in a memo to the city council that the city was near insolvency after the economic recession compounded years of “poor decisions”, including the expansion of retiree benefits, approval of generous labour contracts and the issuance of large amounts of debt.

Mr Deis called for an investigation into the causes leading to the city’s distress.

Other cities around the US are suffering similar fiscal problems. Fears mounted a year ago on the potential for mass defaults and bankruptcies, but so far such widespread distress has not materialised.

Central Falls, Rhode Island and Jefferson County, Alabama however, both filed for bankruptcy last year. Vallejo, another city in northern California, languished in a costly bankruptcy after filing in 2008 before exiting last year.

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