( CNN ) -- The California city of Stockton approved a special budget Tuesday night , paving the way for it to become the largest American city to declare bankruptcy . `` Unfortunately , we have no comprehensive set of agreements with our creditors to offer you ... that would eliminate the $ 26 million budget deficit and avoid insolvency , '' City Manager Bob Deis said at a council meeting . Negotiations , however , continue with some creditors . `` I think we 're very close in announcing some possible deals with some creditors in the future , '' he said . `` In fact , it could be as many as a third of the creditors ... that 's not enough to balance the budget . '' From the archives : Rhode Island city files for bankruptcy . The city council approved the pendency plan on a 6-1 vote , meaning Stockton will file for protection under Chapter 9 federal bankruptcy laws before Sunday when the new fiscal year begins . The plan is essentially a new budget for the city of about 291,000 , spelling out day-to-day operations under bankruptcy . The city , which is about 80 miles east of San Francisco and about 50 miles south of Sacremento , says it will continue to pay employees , vendors and service providers , but curtail most other expenditures , such as debt service . Numerous governments across the country have filed for bankruptcy since the financial crisis of 2008 . Last year , Jefferson County , Alabama , filed the biggest municipal bankruptcy in U.S history . In December , the county was $ 4.2 billion in debt . The largest previous municipal bankruptcy case was filed in 1994 by Orange County , California , which owed approximately $ 1.7 billion to creditors . From the archives : Plan released to keep Harrisburg , Pennsylvania , from bankruptcy filing . Stockton Mayor Ann Johnston said in the 1990s the city council approved labor contracts and retiree health insurance plans believing the hyper-growth the city was experiencing would continue forever . Then came the economic downturn of recent years , and debt-strapped California 's raid on city finances , said Johnston . Since 2009 , Stockton has cut $ 90 million from its budget , she said . The city has reduced its police force by 25 % , its fire department by 30 % and other city jobs by 40 % but has not been able to get itself financially stable . And then , said Johnston , there was the housing bust . `` The housing was the straw that broke the camel 's back , '' said Johnston . `` We had this bubble in our economy here . We were booming in construction . We were building about 3,000 homes a year . It began to fall off sharply three and a half years ago , '' she said . `` This past year only 105 single-family construction permits were issued . '' Richard Acosta is a 75-year-old retiree in Stockton and said everywhere he looks there are for-sale signs . `` You have two across from my house . There was like four on the other side , and there 's about two or three more down on the next block , '' said Acosta . `` I always thought the city of Stockton was really gon na go somewhere . But I do n't really see any future in it for five to 10 years before something really is going to happen here , '' he said . CNN 's Ed Payne and CNN Radio 's Jim Roope contributed to this report .
It will file for bankruptcy by Sunday . The city council approves a special tax plan on a 6 - 3 vote . The city says it will continue to pay employees , contractors and service providers .