The city of Vallejo filed for bankruptcy protection Friday to deal with a ballooning budget deficit caused by soaring employee costs and declining tax revenue.
The San Francisco Bay area suburb of about 120,000 residents became the largest California city to seek bankruptcy protection.
Mayor Osby Davis said the city's attorneys filed papers seeking Chapter 9 bankruptcy protection in federal court in Sacramento.
"We've exhausted all avenues at this point, and this is all we had left," Davis said. "I had hoped to avoid it all the way up until yesterday. It's something we can't avoid ... We can't pay our bills."
Vallejo will ask the judge to set a June 9 deadline for creditors to challenge the filing, said Marc Levinson, the city's bankruptcy attorney. If there are no objections, the city automatically enters bankruptcy protection.
The seven-member City Council voted to authorize the city manager to file for bankruptcy protection on May 6 after months of failed negotiations with its police and firefighters unions.
After that vote, city officials and union representatives continued to meet in hopes of reaching a last-minute deal to stave off the bankruptcy filing, but the two sides couldn't come to an agreement.
Vallejo, a mostly working-class city about 30 miles northeast of San Francisco, faces a $16 million budget deficit in its fiscal year starting July 1.
The foreclosure crisis and economic downturn have caused a sharp decline in revenue from sales tax, property tax and development fees.
Many officials and residents blame Vallejo's chronic financial problems on labor contracts that they say provide overly generous pay and benefits to the city's police officers and firefighters. Those city workers comprise about three-quarters of Vallejo's general fund.
The unions say compensation for Vallejo's public safety employees is in line with that of other Bay Area cities, and blame the fiscal crisis on government mismanagement and poor decisions by previous city councils.
Union representatives did not have an immediate comment on Friday's filing, but they previously said they would challenge it and argue that the city isn't insolvent. They say city officials rejected offers of salary cuts that would help solve the financial crisis.
In addition to being the largest California city to file for bankruptcy protection, Vallejo is the first to do so because its revenues cannot cover expenses, experts say.
Orange County filed for bankruptcy protection in 1994 after it lost money in a series of bad investments; the Southern California town of Desert Hot Springs filed in 2001 after losing a lawsuit.
Some officials worry that seeking bankruptcy protection could damage the city's reputation and ability to attract residents and businesses, but others say the city could eventually emerge stronger and more financially secure.
"The mismanagement of the city for so long has tarnished our reputation, not bankruptcy," said Councilwoman Stephanie Gomes. "Bankruptcy gives us the opportunity to fix that mismanagement and put a long-term plan in place to ensure true growth and recovery."