Barely five years ago, Stockton looked like a winner.

Local real estate values quadrupled between 2000 and 2006. City tax revenues skyrocketed. Stockton's general fund was growing by 10 percent a year. The port city redeveloped its waterfront and built a new arena. It gave pay raises to cops and cut deals in 2007 to boost pensions and pay for other employees.

Now Stockton is broke.

After years of bad budget decisions based on an overly rosy reading of the economy, Stockton – population 292,000 in 2010 – this week faces the ignominy of becoming the largest city in America ever to file for bankruptcy.

The City Council has scheduled a vote Tuesday on an austerity program that the city could carry out while in Chapter 9 bankruptcy reorganization, which would provide protection from creditors while it renegotiates its debts. Plans are to slash retired employees' health benefits, and perhaps eliminate them altogether; end city bond payments, and restructure labor agreements.

"The city is insolvent from a service and budget basis today and faces cash insolvency in its general fund by July 1," City Manager Bob Deis wrote to the City Council on June 5 – the same day the council voted to give Deis authority to take Stockton into bankruptcy reorganization.

In an effort to avert a bankruptcy filing, Stockton held last-minute negotiations to seek concessions from bondholders, employee unions and retirees. The city manager is scheduled to tell the City Council on Tuesday whether sufficient savings were found by the Monday deadline.

Deis could not be reached for comment last week. But in a letter he sent to employees on Thursday, he suggested that no miracle rescue is in the works. "At this point, the city must make plans to move forward and use the services and protections in bankruptcy to preserve basic health and safety services for the citizens of Stockton," Deis wrote.

This is not what city leaders had in mind.

Stockton was the place where the median home price shot up from $110,000 to $400,000 in six years. The city issued 3,000 new residential building permits a year between 2003 and 2005.

It was the place with the $129 million waterfront redevelopment, including a gleaming new $68 million arena for a minor league hockey team.

It was the city that in 2007 sold bonds to invest $125 million in a CalPERS retirement fund to take care of its employees. It also bought an eight-story, $48 million office building in anticipation of opening a new city hall.

Now Stockton's retirement fund investment is worth $100 million. The bond debt, meanwhile, could cost the city $248 million.

As for the arena? It's decidedly underbooked.

"It's the white elephant on the water," said Jeffrey Michael, director of the Business Forecasting Center at Stockton's University of the Pacific.

Betting on the bubble

The gleaming new city hall never opened. Instead, the building was repossessed – along with three city parking garages – after Stockton defaulted on bond obligations.

"It looked like city leaders thought the good times were going to be long term," said Mike Polyakov, director of research for a public policy study group, California Common Sense. "They laid out all these things and they locked in a lot of terms that didn't account for the possibility of things going bad.

"They basically thought the bubble was the real thing."

California Common Sense laid bare the Stockton fiscal debacle this month in a report titled "How Stockton Went Bust: A California City's Decade of Policies and the Financial Crisis that Followed."

The report describes a city that bet big on continued prosperity and now faces the likelihood of becoming California's fourth local government in history – after Orange County in 1994, Desert Hot Springs in 2001 and Vallejo in 2008 – to go into bankruptcy protection.

Stockton now has a $26 million deficit in a $521 million city budget after making cuts to address $90 million in deficits over the past three years.

The city has laid off 25 percent of its police officers, 30 percent of its firefighters and 43 percent of other city staff. It has cut the pay of city employees between 12 percent and 23 percent. It has increased fines for parking citations and code enforcement violations.

In a statement issued Wednesday, Stockton Mayor Ann Johnston indicated that the city would rather file for bankruptcy than cut any more employees.

"If we don't reach agreements with our creditors that help us avoid insolvency, we have to be prepared with the alternatives we have worked so hard to avoid," Johnston said. "We cannot sacrifice the health, safety and welfare of our community."

Creditors galore

While the economic downturn affected virtually every California city, few were more leveraged than Stockton.

"What makes the Stockton situation particularly perilous is that the city took on a high-risk budget before the storm," Michael said.

The city now has one of America's highest foreclosure rates. Its once-roaring construction industry has shriveled. In 2010, the city issued just 150 residential building permits.

Stockton's tax revenues have collapsed, and it now faces more than $800 million in unfunded liabilities for pensions and other retirement benefits.

Some $450 million of that stems from the city's promise to provide health coverage for 1,100 current retirees.

Under Stockton's proposed reorganization, retirees who now get health insurance worth $900 to $2,000 a month will instead get city payments for health care ranging from $150 to $450 a month, depending on their service time. Even those payments could end next year.

"They're phasing out retiree health care entirely," said Dale Ginter, a Sacramento bankruptcy attorney who represented city retirees in the Vallejo bankruptcy case and is watching the developments in Stockton.

The city's three years of squeezing expenses have inflamed tensions among employee groups, particularly police.

Last year, the Stockton Police Officers Association bought a house next door to Deis – a move the city manager called an act of intimidation – and put up a billboard touting the city's soaring crime rate.

"Welcome to the 2nd Most Dangerous City in America," it read, citing Stockton's standing as second in California to Oakland in violent crime. "Stop laying off cops!"

Michael, the UOP economist, says it's unlikely Stockton will make more cuts in police and other critical services. He said the city's slide into bankruptcy protection is all but unstoppable.

"They've landed in a situation where they've got multiple creditors," he said. "There are so many people in these negotiations and the budget gap is so large, bankruptcy is probably inevitable."

Editor's Note: This story has been changed from the print version to correct the number of local governments that have filed for bankruptcy protection. Corrected on June 25, 2012.

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