Stockton, California was poised on Tuesday to take a major step toward becoming the largest US city ever to file for bankruptcy after talks with its creditors on Monday at midnight.

Negotiations aimed at averting bankruptcy may press on informally, the city's spokeswoman said, adding that city officials would next discuss any moves toward bankruptcy at the city council meeting on Tuesday evening.

The council's main order of business will be taking up and voting on a proposed budget to guide Stockton during bankruptcy, an option city officials have been considering since February.

City Manager Bob Deis, who the council has authorized to file for Chapter 9 bankruptcy, last week unveiled the budget proposal, also known as a pendency plan.

The plan assumed Stockton, a city of 292,000 people about 85 miles east of San Francisco, would fail to win concessions from its 18 creditors to close its $26 million shortfall for the fiscal year beginning on July 1.

To help close the budget gap, Stockton's plan would suspend $10.2 million in debt payments, a move likely to trigger rating agencies to further downgrade the city, and reduce spending on employee compensation and retiree benefits by $11.2 million.

About $7 million in savings would come from cutting retiree healthcare benefits for one year and then phasing them out. Stockton officials have said the benefits are a crushing expense due to their fast rise and projected liability of $417 million.

Stockton's confidential mediation with its creditors -- required by a state law approved after the bankruptcy of Vallejo, California in 2008 -- was part of an effort launched in February by city officials to restructure the city's finances in time for the beginning of its next fiscal year.

The plan, however, left open the possibility of a bankruptcy filing in light of Stockton's severe financial troubles.

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