A disastrous gamble in the insurance business has pushed this Los Angeles suburb to the brink of financial collapse and raised fears that Gardena's bankers might try to seize the city's parks, gymnasiums, even the swimming pool.

With a $26 million debt payment due next month, the city with the slogan "Rich Heritage, Bright Future," could join the short list of U.S. municipalities that have gone bankrupt.

"I don't want to go bankrupt. I probably shouldn't say that, but it's certainly one of the things that's an option," said City Manager Mitchell G. Lansdell.

The creeping crisis in this working-class city of 60,000 is a cautionary tale of misplaced confidence, bad luck and risky decisions.

A dozen years ago, the City Council t borrowed heavily to start the Municipal Mutual Insurance Co.

The municipal foray into the insurance business -- unprecedented in California and perhaps anywhere else in the country, industry experts say -- was supposed to do two things: cover the city against costly lawsuits, and churn out a profit. In the end, Municipal Mutual did neither.

The debt payment due on Dec. 15 is nearly as much as the total revenue Gardena receives from local taxes and fees in a year.

If Gardena goes bankrupt, police will not stop patrolling the streets, but layoffs and cuts in services could follow.

What is more, the financing that was used to create the insurance company and a soured homebuyers program was secured with city property. Lansdell and other city officials said that if the city defaults, the banks could be legally entitled to seize gymnasiums, tennis courts, parks, the pool, the community center, a bus-repair yard -- even the police station.

A lawyer with a firm the city recently hired, however, said that under state law banks cannot seize municipal assets if a city defaults. Banks agree to accept as security assets they could not seize because "cities don't default on their bonds or their debts very often," lawyer Richard Levin said. "And so most lenders will figure it's a good credit risk."

While there has been talk of financial trouble at City Hall before, the seriousness of the situation did not become fully clear until the City Council earlier this month voted to hire lawyers who specialize in bankruptcy.

"I don't get it," real estate agent Amy Tanaka said earlier this month, before the City Council vote. "I thought we were doing okay."

Lansdell said the city is negotiating with the banks, which he identified as Japanese-owned Sumitomo Trust & Banking Co. and Union Bank of California. Sumitomo, which is owed more than $20 million, had no comment. Union Bank officials did not return calls for comment.

How did Gardena get into this mess?

As did a lot of cities nationwide, Gardena struggled in the 1980s to keep up with ballooning liability insurance rates. As lawsuits became more common, a grandmother's slip on a sidewalk or a car crash blamed on a misplaced street sign could leave the government of a small city reeling.

In a burst of entrepreneurial brio, Gardena used $10 million borrowed on the bond market to create Municipal Mutual. Under the plan, Municipal Mutual would turn a profit by enrolling other cities as policyholders.

"It appears that no other municipality has tried to do what Gardena did," said James Hamilton, an insurance expert at the National League of Cities.

Nevertheless, outside insurance advisers promised "it was a good thing and we could make money," said former city councilman James Cragin, who served on the company's board of directors.

Though independent on paper, the company had close ties to the city. Gardena had a seat on the board, and one city official who helped establish the company later became president.

Gardena became the company's inaugural customer in 1993. But by the time Municipal Mutual got rolling, the market had changed. Big insurers were again writing new business, and many municipalities were entering not-for-profit insurance pools. The company struggled to find customers, and in 1995 it borrowed $20 million more on the bond market to refinance the original debt.

"We took one credit card and went, 'Give us another credit card,' " Lansdell said.

Now the company is under state oversight and is effectively out of business.

"It's like being CEO of the Titanic," sole employee Dennis Evans said.

City officials are so desperate they have even discussed begging homeowners for more than $1,000 each.

In a recent interview, Lansdell thumbed through manila folders stuffed with financial documents but no answers.

"Got any ideas for me?" he asked darkly. "A lot of car washes?"

Borrowing by Gardena was secured by physical assets such as the city's Rush's Gymnasium, but there are questions whether it could be seized.Unidentified man enters city hall for Gardena, Calif., whose motto is "Rich Heritage, Bright Future." Gardena could default on its loan payments.