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Stockton, Calif., to enter bankruptcy, judge rules

| Monday, April 1, 2013, 8:54 p.m.

SACRAMENTO, Calif. — The people of Stockton will feel financial fallout for years after a federal judge ruled on Monday to let the city become the most populous in the nation to enter bankruptcy.

The case is being watched closely because it could answer the significant question of who gets paid first by financially strapped cities — retirement funds or creditors.

“I don't know whether spiked pensions can be reeled back in,” U.S. Bankruptcy Judge Christopher Klein said.

The potential constitutional question in the Stockton case is whether federal bankruptcy law trumps a California law that says money owed to the state pension fund must be paid.

In making his ruling, Klein disagreed with creditors who argued that Stockton failed to pursue all avenues for straightening out its financial affairs.

“It's apparent to me the city would not be able to perform its obligations to its citizens on fundamental public safety as well as other basic government services without the ability to have the muscle of the contract-impairing power of federal bankruptcy law,” Klein said.

A statement released by creditors said the group “respectfully disagrees with the court's ruling.” The legal team for those creditors declined to say whether it would ask Klein for permission to appeal his decision — a requirement of bankruptcy code. Legal observers expect the creditors to aggressively challenge the repayment plan presented by Stockton in the next phase of the process.

Stockton has tried to restructure some debt by slashing employment, renegotiating labor contracts, and cutting health benefits. Library and recreation funding have been halved, and the scaled-down police department only responds to emergencies in progress. Its crime rate is among the highest in the nation.

Since cities can't liquidate assets, those that declare bankruptcy must come up with a plan for creditors to forgive some of the debt.

Holders of the biggest portion of Stockton's debt insured $165 million in bonds the city issued in 2007 to keep up with payments to the California Public Employees Retirement System as property taxes plummeted during the recession.

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