By HANNAH DREIER
STOCKTON, Calif. (AP) -- A red, white and blue sign declaring Stockton an "All-America City" still adorns City Hall, but the building's crumbling facade tells the real story of the community's recent fortunes.
Since the sign went up nearly a decade ago, Stockton has twice topped Forbes magazine's list of "America's most miserable cities." And now another unflattering title could be headed its way: largest American city to declare bankruptcy.
The city of 290,000 that rode the wave of the housing boom in the late 1990s and early 2000s now finds itself littered with foreclosed homes, saddled with pension, health care and other obligations it can't afford, and unable to pay its bills.
The City Council voted last month to suspend $2 million in bond payments and begin negotiations with bond holders, creditors and unions. A new California law requires that cities begin a 60-day mediation process before filing for Chapter 9 bankruptcy, though city leaders can file at any time if negotiations stall.
The police union, upset over job cuts and a record murder rate, posted billboards tracking the city's "body count" and giving out the city manager's phone number. One blood-spattered sign read: "Welcome to the 2nd most dangerous city in California: Stop laying off cops!"
The city's deficit now is $15 million -- a little more than 9 percent of its annual general fund -- and that could double in the next fiscal year.
"We are hanging on by our fingertips," said Mayor Ann Johnston, who has overseen three fiscal emergency declarations and hopes to persuade the city's creditors to forgive some debt.
Founded along the San Joaquin River during the Gold Rush, Stockton has much to boast. It's a gateway to Yosemite National Park and sits atop fertile soil that supports an agricultural industry that built the city and still is its underpinning -- the three-day annual Stockton Asparagus Festival draws 100,000 people. It's one of just two deep-water inland ports in California.
During the housing boom, people priced out of the San Francisco Bay area were trundling down Interstate 5, buying up homes in subdivisions built for commuters.
"We became affordable housing for the Bay Area," Johnston said.
City leaders believed the influx of residents and wealth would finally lift the community into its rightful place as a top-tier city. From 2000 to 2005, median home prices quadrupled to $400,000.
The downtown waterfront is a monument to the high hopes of the era. An extensive promenade leads past a 12,000-seat sports arena, a gleaming hotel that opened as a Sheraton and an upscale restaurant, much of it bought with city money.
Today, there are more Canadian geese than people in this part of town. Residents say they avoid the arena because they don't feel safe at night. The Sacramento restaurateur the city lured with generous incentives has closed his doors-- though white tablecloths still adorn the sleek dining room-- and the Sheraton management has also left town.
A developer recently bought the hotel at auction and is refashioning the rooms into dorms for University of the Pacific students.
Though many communities across the country are struggling with their finances and some already have filed for bankruptcy -- Pennsylvania's capital of Harrisburg, Jefferson County, Ala., and little Central Falls, R.I. -- Stockton's litany of problems stand out.
The unemployment rate has doubled over the past decade and now hovers around 16 percent. A fifth of residents live below the poverty line.
The city has the second-highest foreclosure rate in the nation -- it alternates with Las Vegas for the dubious distinction of first place. Home prices have fallen to pre-2000 levels, and as many as half of homeowners owe more than their houses are worth.
The looming bankruptcy was a subject of discussion at Weston Ranch subdivision, where three unemployed neighbors passed a rainy afternoon drinking beer in lawn chairs. All three are underwater on their homes.
George Rios, 42, said his family would have left Weston Ranch already if the bank had not reduced their home loan by half.
"You're here because of your property," he said, gesturing to the three empty homes he can see from his lawn. "If you don't have a property, why are you going to stay?"
The housing bubble masked decades of sloppy bookkeeping, according to City Manager Bob Deis, including double counting parking ticket revenue and overestimating the general fund.
"I've never seen anything like this, I've never heard anything like this, and it goes back a long time," he said.
Deis also faults the city's generous retirement plan, which includes free health care. Stockton expects to spend $9 million on health benefits for retired workers next year, more than it pays for current employees. The city's is carrying a $417 million unfunded liability for retiree health care over the next 30 years.
The police union, the Stockton Police Officers Association, is fighting to stop the city from defaulting on its promises. The union bought the house next to Deis', a move President Steve Leonesio said was a coincidence.
With staffing down by 25 percent, the department can no longer man its main station, Leonesio said. Yellow caution tape fluttered around the building's entrance on a recent weekday. A vandal had smashed out the glass doors. Last year, someone shot at the building from a car, stippling the brick wall with bullet holes.
The crime-prone city saw a record 58 murders last year. Police no longer look for stolen cars or take reports for lower-level crimes.
Leonesio warned that Stockton might have to bring in the National Guard if it declares bankruptcy.
"We don't have enough officers here," he said.
The city has a feel of defeatism, said Robert Benedetti, political science professor at University of the Pacific.
"Every time that Stockton seemed to be getting going, something bad happens," he said. "The citizens who live here don't understand exactly why things go wrong here as they do."
Sara Gonzales, 24, manages the Beach Hut Deli across from Stockton's 16-screen waterfront movie theater. An 11 year-old girl was shot in the ankle last summer while sitting on a bench here. Since then, people have kept their distance after dark.
Gonzales, a University of the Pacific graduate, had wanted to stay in town to be near her young niece. Now she is working on transferring to another of the sandwich company's California franchises.
"It's progressively gotten worse since I've been here," she said. "I don't want to leave because of my family, but I'm over Stockton."
Copyright 2012 The Associated Press.