LOS ANGELES, June 27, 2012 (AFP) – The town of Stockton in California was headed for the nation’s largest ever municipal bankruptcy Wednesday after it failed to find a way to close a $26 million budget shortfall.

A victim of the collapse of real estate prices, which wiped out its tax base, the Stockton city council decided late Tuesday to implement a “pendency plan”, for managing curtailed spending ahead of a court filing for protection.

“The city will file sometime before Friday, close of business,” city spokeswoman Connie Cochran told AFP.

In a statement the city council said negotiations with creditors had failed to find a way to close the shortfall, after Stockton trimmed $90 million from its deficit over the last three years.

“The city is fiscally insolvent and must seek Chapter 9 bankruptcy protection,” the statement said.

The city government could not continue to cut services to save money. “Doing so would harm the health and safety of its citizens,” it said.

Instead, it is halting payments on bonds and other debt pending bankruptcy reorganization under Chapter 9 of the US bankruptcy code, which helps bankrupt cities restructure under protection from creditors.

Located in California’s central valley about 60 miles (100 kilometers) east of San Francisco, the city of 300,000 grew sharply in the 2000s helped by the real estate boom and cheap loans.

But many of the city’s new neighborhoods were left empty as housing prices collapsed and buyers defaulted. The foreclosure rate in the city was one of the country’s highest, with thousands of buyers walking away from their loans.

That devastated a key portion of the city’s tax base, forcing sweeping layoffs of municipal employees and payment and benefit cuts for remaining workers and retirees.

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