Another city mentions the B word: Stockton, California will “skip some bond payments in an effort to restructure its precarious finances.”

Along with defaulting on about $2 million of debt payments through the end of its current fiscal year, the city located about 85 miles east of San Francisco will seek mediation with its major bond holders to try to get a break on its debt to help tackle a budget gap projected to range from $20 million to $38 million.

While Stockton officials say they hope to avert bankruptcy, the city has hired an attorney who represented much smaller Vallejo, which drew national attention to financial problems of local governments in the most populous U.S. state.

These are the kind of situations that put a chill on the municipal bond market in early 2011, and that make any talk of municipal bankruptcy a hot topic for the financial community.

Like every municipal bankruptcy story, this one emphasizes labor union negotiations and bond ratings:

[City Manager Bob] Deis said Stockton can neither afford more cuts to its services to save money nor raise revenue with tax increases due to the city’s weak economy, leaving the city little option but to ask its major bond holders for a break on some its debt.

Wall Street reacted swiftly to Deis’ default plan by cutting Stockton’s credit rating.

Moody’s Investors Service on Friday lowered Stockton, California’s general fund-supported debt ratings to below investment grade, a move affecting about $341 million in debt, and Standard & Poor’s Ratings Services cut its issuer credit rating on the city to speculative grade.

Fitch Ratings on Monday downgraded by several notches its underlying ratings on four series of Stockton Public Finance Authority water revenue bonds, leaving each at BBB-, the firm’s lowest investment grade rating. Fitch does not rate the city.

Stockton officials may be using default and talk of bankruptcy to try to wring concessions from city labor units to further cut expenses, said Matt Dalton, chief executive of Belle Haven Investments in White Plains, New York, which has more than $1 billion in municipal bond assets under management.

“They need to fire a shot across the bow so that everybody knows they’re serious,” Dalton said.

Read: Bottom Line – Stockton, Calif., takes ‘first step towards bankruptcy’  (, 2/29/12)