CLE ELUM, WA – The city of Cle Elum has filed for municipal bankruptcy protection, making it only the second city in Washington state history to do so.

The move comes after the Cle Elum City Council voted Monday to authorize the bankruptcy, ending several months of mediation talks with a Seattle area developer without coming to an agreement. With one member absent, the Council voted 6-0 to authorize Mayor Matthew Lundh to pursue filing for municipal bankruptcy, something that has been done by just one Washington city in the past 35 years.

With a population of about 2,200, Cle Elum has been on the hook for $22.3 million — five times its annual general-fund budget — after an arbitrator ruled in November that it had violated a 2011 agreement by delaying the development of Ederra, a new community of 1,000 houses. The total amount is now over $25 million when interest and legal fees are applied.

While the arbitration ruling and award is settled, the city of Cle Elum and City Heights Holdings, owned by developer Sean Northrop, have continued to point fingers at each other over the past several months, leading to the city’s bankruptcy filing.

When the Cle Elum City Council first voted to file for municipal bankruptcy in January, it stated that Northrop and City Heights Holdings had not provided adequate options to resolve the dispute without causing major financial insolvency for the city.

The councilmembers ultimately decided in March to enter into mediation with Northrop and City Heights Holdings, hoping to come up with an agreement and a financially sustainable payment plan that would prevent the city from having to file for bankruptcy.

City officials said they turned back to bankruptcy because City Heights rejected the last offer the city made during its final mediation session on June 16. In a written statement released Wednesday, city staff said they were willing to “make significant concessions” to avoid bankruptcy, but ultimately could not go any further without “jeopardizing the ability to pay for necessary city services over the next 20 years.”

“I vote Yes again with the deep understanding this is not the best option, this is not a good option, it’s the last option we have,” said Councilwoman Cassidy Buechle-Curtis, who represented the city in mediation talks, during the Council meeting Monday.

In a written statement, City Heights Holdings said the mediator had been circulating a draft of a “comprehensive” settlement agreement between the city and City Heights Holdings that would have enabled the city to avoid bankruptcy.

City Heights Holdings officials said it had accepted significant concessions — including multimillion-dollar reductions and a decades-long payment plan — that would be within the City’s current financial capacity, and that there was “substantial agreement” between the two parties.

“At no time did the city indicate to [City Heights Holdings] or the mediator that it was rejecting the June 20 draft, nor did it propose a ‘final and best offer’ or communicate a breakdown. No specific objections were shared,” the company said. “Instead, the city abruptly went silent — then filed for bankruptcy.”

Though rarely invoked, filing for bankruptcy can allow municipalities to come up with a financial solution when facing the prospect of financial insolvency. To do this, the municipal entity must prove insolvency; without proof, the petition for bankruptcy can be dismissed.

In 1991, North Bonneville became the first, and until now the only, city in Washington to file for Chapter 9 bankruptcy after being ordered to pay the federal government an amount roughly 10 times its annual tax income.

City officials say they believe bankruptcy is the best option to work toward a “sustainable resolution” that would ensure it could continue providing services for residents.

During the Council meeting, Buechle-Curtis said that while there were moments of “mutual understanding” and progress during the talks, it wasn’t enough to come away with an agreement.

“It’s not where we want to be, but it’s where we are at,” she said.

In a news release last week, city officials said City Heights had issued three separate filings with King County Superior Court, which have tied up a combined $696,000 in Cle Elum’s bank accounts, impacting payment to creditors.

City Heights Holdings wrote in a statement that the collection process is under the purview of an outside lender. “It remains in the best interest of Cle Elum’s taxpayers, residents, and businesses for the city to resolve this matter before collections escalate,” the company said.

But the city argues that City Heights Holdings’ refusal to cancel the garnishments has pushed the city into bankruptcy and that the company “leaked selective and misleading information that does not tell the full story.”

The city stated that it had given City Heights Holdings a June 20 deadline to accept its most recent proposal, and that the company declined it.

“If a judge orders that the parties are free to provide all settlement communications from the mediation process, the City will do so, and it will not paint [City Heights Holdings] in a favorable light,” the city said.

Northrop and other City Heights Holdings representatives dispute the city’s claim that it rejected the offer, and said they were still willing to come to an agreement.

“[City Heights Holdings] remains prepared to complete the deal in that spirit — or to protect its rights through the court process, if required. But our hope is for closure, not conflict,” the company said.