Judge Christopher M Klein ruled in favour of the Californian city's application to be recognised as insolvent after a shortfall in revenues left it with a multi-million dollar hole in its finances and unable to meet debt repayments.

When the application for Chapter 9 bankruptcy relief was made in June 2012, the city of almost 300,000 people had recorded a $90m budget deficit over the previous three years and was facing another $26m shortfall in 2012/13.

The city's creditors' had argued that, instead of entering bankruptcy, officials should have cut spending further or increased taxes. They could now lose out on a chunk of the money they are owed by the heavily indebted city.

Judge Klein’s ruling means Stockton will be protected from the creditors’ claims as it attempts to develop and agree a long-term plan to put its debt on a more sustainable footing.

City manager Bob Deis said: ‘After nine months and millions of dollars in legal fees, the judge validated what we have been saying from the beginning, that the city is insolvent and needs the protection of bankruptcy to adjust its debts.

‘The next steps are to confirm a plan of adjustment through the restructuring of our debt, begin the recovery process and move Stockton forward.’

In his testimony to the court, Deis highlighted the problems caused by poor fiscal practices and accounting errors by his predecessors. He also noted the cost associated with the city’s commitment to contribute to pensions through the Californian Public Employees’ Retirement System.

Deis added: ‘It’s unfortunate that we have been forced to spend millions of dollars, thousands of hours and almost a year on this effort.

‘These are valuable resources and money that could have gone toward addressing the critical safety needs of our community, restoring services and paying our creditors.’

The city now hoped all of its creditors would follow the bond issuer Ambac in agreeing to an adjustment plan, he said. ‘We look forward to obtaining a confirmed plan to emerge from bankruptcy and restoring the city to fiscal health.’

The ruling was welcomed by Anne Stausboll, chief executive of the CalPERS pension fund, who noted the city’s commitment to meet its pension obligations. ‘The city has consistently acknowledged the importance of providing benefits to its employees through its existing relationship with CalPERS consistent with state law,’ she said. ‘CalPERS will continue to act as a fiduciary and protect and defend the integrity and soundness of the Pension Plan.’