The city of Vallejo, located in the San Francisco Bay Area, on Friday filed for Chapter 9 bankruptcy protection and adjustment of its debts, in U.S. Bankruptcy Court for the Eastern District of California in Sacramento.

According to the case that has been assigned case number 2008-26813, Vallejo is facing a $13.2 million budget shortfall this year partly due to the slowing housing development and resale markets, declining asset values and declining retail sales, and similar shortfall is projected in fiscal 2008-09. The city owes its retirees $219 million and is carrying $163 million in long-term debt.

The case had been expected since May 6, when the city council approved the drastic move. Vallejo, with more than 100,000 residents, was the first sizable city in California to file for bankruptcy.

Vallejo Mayor Osby Davis said, "It is a sad day for the city and for me personally. It is not something I ever wanted to do. We did everything we could do to find other solutions and other alternatives, but we were not able to."

California's last governmental bankruptcy filing was in 1994 when Orange County's finances ran aground on soured investments linked to derivatives.

Chapter 9 is a bankruptcy filing for municipalities. It provides a financially stressed municipality protection from its creditors while developing a plan for adjusting its debts. The debt reorganization typically involves extending debt maturities, reducing the amount of principal or interest or refinancing the debt by obtaining a new loan.