Acapulco, one of Mexico's top tourist spots, is in "technical bankruptcy".
Mayor Luis Walton, who took office two months ago, says the city government is unable to pay a debt of more than $US170 million.
"We are in a state of technical bankruptcy," he told a news conference on Tuesday, accusing the previous administration of inflating public wages and signing contracts that cannot be paid.
Former mayor Manuel Anorve acknowledged that the number of public workers rose from 7920 to 8168, with the police force accounting for the bulk of this increase.
AFP reports nine million tourists visit Acapulco every year.