A fiscal emergency is considered the first step towards Chapter 9, said CNBC's Jane Wells, reporting on whether Atwater, California will become the fourth town to declare bankruptcy in the state.

Municipal bankruptcies are spreading like a “disease” in California, one public finance expert warned Wednesday as the city of Atwater declared a fiscal emergency with a budget gap of more than $3 million.

The city’s council approved the move on Wednesday night, putting it on the path to becoming the fourth city in the state to declare bankruptcy this year.

With a population of 28,000, Atwater fell on hard times after its housing market imploded and sent property tax revenue plummeting. Furloughs and a hiring freeze had not been able to stem Atwater's losses.

San Bernardino becomes 3rd Calif. city in 2 weeks to file for bankruptcy protection

Municipal debt market analysts are keeping a close eye on the finances of local governments in California out of concern that some could use fiscal emergency declarations as a way to speed Chapter 9 filings to attempt to shed financial obligations.

"In California, we have a disease, and the disease is spreading," David Kotok, chief investment officer at Florida-based Cumberland Advisors, told the State & Municipal Finance Conference conference in New York on Wednesday, according to the San Francisco Chronicle.

"I suspect we're going to see wholesale warnings and downgrades" among bond rating issuers in the state, he said.

If it went bankrupt, Atwater would follow Stockton, San Bernardino and Mammoth Lakes by making a Chapter 9 filing.

San Bernardino, California's city council in July authorized a bankruptcy filing after declaring a fiscal emergency. The city of 210,000 residents 65 miles east of Los Angeles, filed for bankruptcy on August 1.

By contrast, Stockton, a city of 300,000 located about 62 miles to the northwest of Atwater, became California's first city to file for Chapter 9 bankruptcy protection this year after 90 days of inconclusive mediation with its creditors.

Kim Rueben of the Tax Policy Center explains why some American cities are running out of money, filing for bankruptcy, and making drastic cuts in the process.

Mammoth Lakes, a resort town of about 8,000 residents in California's Sierra Nevada mountains, followed Stockton into bankruptcy court, saying it could not afford a $43 million legal judgment against it. Mammoth Lakes has since reached a settlement with the property developer in the legal dispute and later this month will seek to have its bankruptcy case dismissed.

City officials in Atwater are looking into options for increasing revenue such as raising 20-year-old rates for water services and 10-year-old rates for garbage collection services while clamping down on costs, all while considering whether to pursue a bankruptcy filing.

Union representative Nancy Vinson said 38 of Atwater's non-safety employees have received layoff notices and that 12 are sure to lose their jobs as part of the city's efforts to pare spending.

Vinson told Reuters by telephone that she believes Atwater's financial troubles are so severe that the city will not be able to avoid a bankruptcy filing.

"I believe they're heading straight to bankruptcy," she said.

Mayor Joan Faul could not be reached by Reuters for comment.

Reuters contributed to this report.

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