The San Bernardino City Council has given the go-ahead to the city attorney to prepare the paperwork for a bankruptcy filing.
Four council members supported the move toward Chapter 9 bankruptcy, two voted against, and one abstained.
City officials said without bankruptcy, San Bernardino - saddled with a budget deficit of at least $40 million - could miss next month's payroll.
Mayor Pat Morris and other officials blame the budget crisis on soaring salary and benefit obligations, plunging property tax returns and the loss of an estimated $30 million in state redevelopment funds.
San Bernardino has 30 days to seek bankruptcy protection in federal court. The city manager and city attorney expect it will take a minimum of three years to reorganize San Bernardino's finances and emerge from bankruptcy.
But city attorney James Penman also claims former city staff falsified past budget documents going back 15 years to make it appear that San Bernardino was in the black when it was running deficits.