Bankrupt Stockton Is Biggest Failing US City

A federal judge has signed off on years of pain for the residents of Stockton by allowing the northern Californian city to enter bankruptcy.

The ruling will give the municipality special financial protection so it can continue providing basic services.

But it also triggers a nationwide debate over who should get paid first by America's cash-strapped cities - retirement funds or creditors.

Stockton, a city of nearly 300,000 people, has tried to restructure some debt by slashing employment, renegotiating labour contracts and cutting health benefits for workers.

Library and recreation funding has been halved, and the scaled-down police department only responds to emergencies in progress.

For sale signs are dotted across the city of high crime and unemployment

The city crime rate is among the highest in America.

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

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

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 Judge Klein for permission to appeal his decision - a requirement of bankruptcy code.

Creditors want ex-city workers like Pat and Jesse Hernandez to take a hit

Since cities cannot 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 $165m in bonds that the city issued in 2007 to keep up with payments to the California Public Employees Retirement System, as property taxes plummeted during the recession.

Stockton now owes about $900m to cover pension promises - by far the city's largest financial obligation. 

Many struggling cities across California, notably San Bernardino, are in the same situation.

So far, Stockton has kept up with pension payments while reneging on other debts, maintaining it needs a strong pension plan to retain its pared-down workforce.

Attorneys for creditors say that is unfair and city employees, who shared the wealth during the good times, should now endure some of the pain.

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