Stockton, California, is set to become the largest American city ever to declare bankruptcy as officials say mediation with creditors has failed.
The river port city of 290,000 in Central California has seen its property taxes and other revenues decline, while expensive investments and generous retiree benefits drained city coffers.
City Manager Bob Deis said on Tuesday that officials were unable to reach a deal to restructure hundreds of millions of dollars of debt under a new state law designed to help municipalities avoid bankruptcy.
Monday marked the three-month deadline for negotiations.
On Tuesday, the City Council was expected to vote on a special bankruptcy budget to plug next year's anticipated US$26 million ($32 million) deficit.
The budget is expected to suspend debt payments, reduce payments for retiree medical benefits and increase revenue through code enforcement and parking citations, among other steps.
City lawyers could file for bankruptcy protection in court as soon as Wednesday.