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LINDA WERTHEIMER, HOST:

This is WEEKEND EDITION from NPR News. I'm Linda Wertheimer. In Northern California, the city of Stockton is on the brink of bankruptcy. Stockton's road to insolvency is a long one, and as NPR's Richard Gonzales reports, it appears that, financially speaking, everything that could go wrong in Stockton did go wrong.

RICHARD GONZALES, BYLINE: I'm standing at Weber's Point in downtown Stockton on a marina that symbolizes this city's pain and promise. You see, Stockton is an inland Central Valley city of nearly 300,000 residents. Beyond this marina is the San Joaquin Delta with a channel to the San Francisco Bay. And on this waterfront, there's a sports arena, a new baseball park and a renovated hotel, and they're all reminders of Stockton's better days. Just a few steps away from the waterfront is Stockton's aging City Hall and the office of Mayor Ann Johnston. She points to a series of large photos of those major downtown landmarks all developed in the last decade.

MAYOR ANN JOHNSTON: When we went on a real spending spree and built the arena, the ballpark - a lot of community infrastructure - did a whole lot of things to improve the community that were bonded. I mean, these were all financed through municipal bonds.

GONZALES: In other words, borrowed money to the tune of more than $300 million. City leaders were confident they could repay that debt because Stockton was riding the crest of the housing boom.

JOHNSTON: Stockton had become the affordable housing for the Bay Area. So, we saw an influx of many Bay Area residents coming to Stockton buying brand new homes at very reasonable prices. And the city leaders thought this was going to continue forever.

GONZALES: But today those homes that sold for more than $400,000 are now going for less than $150,000. And Stockton has one of the highest foreclosure rates in the country. Property tax revenues have crashed. Unemployment runs at almost 20 percent.

(SOUNDBITE OF CASH REGISTER)

GONZALES: At a downtown pawn shop, owner Tim Cassidy sees a lot of new customers.

TIM CASSIDY: Both in good times and bad times, we see the best and the worst. You're right, it's a very tough situation for a lot of people unfortunately.

GONZALES: Cassidy says Stockton might be OK if the housing market hadn't crashed.

CASSIDY: When the real estate was booming and the money was coming in, naturally the politicians, being politicians, made everybody happy. Police department, the fire departments all got handsome wages and retirement plans, same as city officials.

GONZALES: But now the bill for those public employee benefits has come due. At a recent news conference, Stockton City Manager Bob Deis said that at one point in the 1990s Stockton offered one of the most generous health plans in California.

BOB DEIS: City employees only had to work one month and then they could retire and the city would pick up their insurance for free for them and their spouse for the rest of their lives.

GONZALES: Deis says that plan resembled, in his words, a Ponzi scheme.

DEIS: Right now, we have an unfunded liability in the retiree health program around $450 million.

GONZALES: Deis says the city is looking at a $20 million deficit in a $160 million budget. Stockton has already cut nearly 100 police officers in the past three years - this in a city with a notoriously high crime rate. The city council has approved a plan to stop paying its creditors and to enter a state-mandated mediation process with its bond holders and employee unions. If those talks fail, bankruptcy is likely. Back in her office, Mayor Ann Johnston says if there's any silver lining here perhaps it's in the lesson for other California cities.

JOHNSTON: So, I'm reading editorials from other cities, I'm reading, you know, whether it's San Diego, San Jose, Fresno, Modesto. They're asking how are we in comparison to Stockton? Are we going to be next?

GONZALES: If Stockton can't solve its budget crisis, it would be the largest American city to go bankrupt. Richard Gonzales, NPR News.

WERTHEIMER: This week on NPR, you'll hear some stories about areas in the country that are seeing their fortunes improve. NPR's Looking Up series tomorrow on MORNING EDITION and on NPR.org.

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