Officials in financially troubled Stockton, Calif., hope a new state law will help the city avoid becoming the nation’s largest to go bankrupt. The Stockton City Council voted Tuesday to enter mediation with its creditors under the new law that requires local government agencies to undergo mediation or hold a public hearing and declare a fiscal emergency before filing for bankruptcy, according to AP.

Stockton will be the first city to test the law, Assembly Bill 506, which is less than two months old. The law requiring nonbinding mediation is designed to force cities seeking Chapter 9 bankruptcy protection to first try to work things out.

The law provides for a 60-day mediation period, with an additional 30 days if a majority of parties involved agree. If they can’t reach agreement at the end of negotiations, the city can proceed to bankruptcy. Or, under the law, the city can skip negotiations by declaring a fiscal emergency that “jeopardizes the health, safety, or well-being of the residents absent the protections of a Chapter 9.”

Opening negotiations come with risks for Stockton. The city already has bargained with its public employees and retirees. More negotiations under the new law could reopen some agreements. It also brings new parties to the mediation, including banks and bondholders.  

Stockton is facing default with a $15 million deficit through the current fiscal year. And projections call for things to get worse – deficits between $20 million and $38 million for the fiscal year 2012-2013, according to AP.

Many Stockton residents fear the city council’s vote to enter mediation is the beginning of the end for the 290,000-population city. “If they vote mediation, it is the first step towards bankruptcy,” said former City Manager Dwane Milnes, according to AP. “That means 1,000 people could lose retirement benefits.”