Business English: City of Stockton counts cost of housing market crash

The neighbourhood of Weston Ranch in Stockton, California, is littered with for sale signs. Cobwebs cling to abandoned, foreclosed houses and water damage buckles the floors. Some front lawns are sprayed with green paint in a feeble attempt to disguise the dead grass.

"Several years ago, this house would have sold for USD350,000," said Bobbie Cabral, an agent with ReMax Gold, while giving a tour of a repainted, re-carpeted three-bedroom home now owned by Freddie Mac, the US housing agency taken into government conservatorship in 2008. "Today, this one's listed for USD124,900."

In the mid-2000s, families seeking refuge from the soaring house prices in the San Francisco bay area flocked to Stockton, 90 miles to the east. The city could hardly build single-family homes fast enough, giving rise to several so-called "bedroom communities" such as Weston Ranch. At the peak, the city received 1,000 construction permit requests a year, said Kathy Miller, Stockton's vice-mayor. Last year, it received 125.

  Soaring house prices in San Franscisco sent people out to Stockton

"When the market crashed, we really landed with a thump," she said.

Stockton has repeatedly claimed the title of the US city hit hardest by the foreclosure crisis. It is now on the verge of earning another superlative: the most populous city to declare bankruptcy in at least three decades.

With Dollar317m in debt, plus another Dollar450m in healthcare liabilities, Stockton is insolvent. It is becoming a test case for a California law that allows cities to restructure their debt out of court and avoid bankruptcy. Other indebted cities will be watching closely.

In the good years, Stockton, home to 292,000 people, promised generous benefits to its workers. But its revenues, which came largely from property taxes, dropped, leaving the city on the hook for promises it can no longer keep.

"Stockton is facing some of the same problems that a lot of cities across the country are experiencing, but they are particularly acute in places like California that were at the centre of the housing boom and bust," said Matt Fabian, managing director at Municipal Market Advisors, a research group that focuses on public finance.

Much like the first-time home buyers who agreed mortgages they could not afford, Stockton officials became hypnotised by the boom in permit fees and property tax revenues, Ms Miller said. It borrowed hundreds of millions of dollars for a new baseball stadium, an arena, and a marina - loans that were based on healthy income projections that Stockton officials assumed would fill city coffers for years.

They didn't.

Stockton will be the first city to test AB 506, a California law passed last year to help stave off a rash of local bankruptcies by requiring cities to try to negotiate with their creditors. To ease its own fiscal troubles, California has cut the amount of aid it directs annually to its cities, further straining local budgets. The recent bankruptcy of Vallejo, another northern California offshoot of San Francisco, also proved long and costly - and to some, a cautionary tale on municipal bankruptcy.

"There are a lot of cities that are where we are at or very close to it," Ms Miller said. "A lot of people are watching us to see how this AB 506 process works. We are drawing a road map for other cities."

While the economies of coastal cities, such as San Francisco and Los Angeles, are expected to recover and begin recouping tax revenue soon, Stockton and other inland cities are not, said Bob Deis, Stockton's city manager.

"We don't think we're going to grow our way out of this problem," he said. "We still see our property values going down next year and not stabilising for a couple years... our other tax revenues are flat."

Local residents are divided over the city's decision to pursue mediation and possibly declare bankruptcy. While city retirees are opposed, fearing the health benefits and pensions they've come to depend on will be stripped away, others seem resigned to the view that restructuring the debt is the only remaining option.

"They can try taxing me more," said Tom Lawson, owner of Buckeye Appliance, a small antique stove shop and repair service, "but they're not going to get anything because I don't have anything to give them".