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 $350,000 [Dh1.3 million],\" says Bobbie Cabral, an agent with Re/Max Gold, while giving a tour of a repainted, recarpeted three-bedroom home now owned by Freddie Mac, the US housing agency taken into government conservatorship in 2008. \"Today, this one\'s listed for $124,900.\" In the mid-2000s, families seeking refuge from the soaring house prices in the San Francisco Bay area flocked to Stockton, 145 kilometres to the east. The city could hardly build single-family homes fast enough, giving rise to so-called bedroom communities such as Weston Ranch. At the peak, the city received 1,000 construction permit requests a year, says Kathy Miller, Stockton\'s vice-mayor. Last year it received 125. Since 2007, Stockton has repeatedly claimed the title of the American city hit hardest by the foreclosure crisis. It is now on the verge of earning another superlative: the most populous American city to declare bankruptcy in at least three decades. With $317 million of debt, plus another $450 million in health care liabilities, Stockton is insolvent. Now it is becoming a test case for a new 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 could 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,\" says Matt Fabian, managing director at Municipal Market Advisers, a research group focusing on public finance. Much like the first-time homebuyers who agreed mortgages they could not afford, Stockton officials became hypnotised by the boom in permit fees and property tax revenues, Miller says. It borrowed hundreds of millions of dollars for a new baseball stadium, an arena and a marina waterfront — loans based on healthy income projections that Stockton officials assumed would fill city coffers for years. They did not. On top of the growing debt and housing bust, the city doled out generous compensation deals for public workers, including six-figure pensions and lifetime health insurance coverage for retirees, with no plan for funding such obligations. 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 a long, 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,\" Miller says. \"A lot of people are watching us to see how this AB 506 process works. We are drawing a roadmap 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, says Bob Deis, Stockton\'s city manager. \"We don\'t think we\'re going to grow our way out of this problem,\" he says. \"We still see our property values going down next year and not stabilising for a couple years… our other tax revenues are flat.\" Locals are divided over the city\'s decision to pursue mediation and possibly declare bankruptcy. \"They can try taxing me more,\" says Tom Lawson, owner of Buckeye Appliance, a small antique stove shop. \"But they\'re not going to get anything because I don\'t have anything to give them.\"