In the 1990s, city officials approved a retiree-health benefit that allowed a worker employed as little as a month to qualify for city-paid retirement health care for the retiree and his or her spouse for life, Deis has said.

"We now have the tail end of a legal but mismanaged program that feels similar to a Ponzi scheme that has ballooned to a $434.8 million unfunded liability that would require 31.58 percent of the payroll to adequately fund it," Deis said in a Feb. 28 report to the City Council.

The city agreed to automatic salary increases regardless of whether it had the revenue to support them. The contract with the fire union required Stockton to compare its pay with that of 16 cities including Huntington Beach, Anaheim and Torrance. Stockton firefighters' salaries were required to rank fifth- highest, according to the city's May 2011 emergency declaration document.

Long-Term Debt

By June 2011, the city had accumulated $977 million in debt on bonds, notes and long-term leases, according to a February report by Management Partners Inc., a Cincinnati-based firm the city hired in December to assess its financial condition.

About $319 million of the city's debt is secured by the general fund, according to the report. That includes $303.9 million in outstanding debt on seven bonds issued from 2003 to 2009, nearly double the city's $163 million general-fund budget for the fiscal year ending June 30.

"It assumed that the growth the city was experiencing was going to continue forever," Deis, the city manager, said at the Feb. 28 city council meeting. "So not only did the city leverage the funds that were coming in during the first decade, it assumed and committed future growth for the next 20 years."

Dedicated Revenue

The bonds were sold with the understanding that there was a dedicated revenue source outside the general fund that would pay the debt, Deis said.

"The bond market wasn't convinced that the special dedicated revenue will be there for the next 30 years so they said, 'We want you to put the general fund as security,'" Deis said. "The dedicated revenues dried up so now the general fund is having to pay the shortfall."

Securities issued in 2004, 2006, 2007 and 2009 increased debt service payments linked to the general fund by 600 percent by fiscal 2013 from fiscal 2007. That created "major cash flow demands" after revenues and reserves fell, according to the Management Partners report.