by Jerry Robinson, FTMDaily.com Editor-in-Chief

Continued economic woes in the Golden State leave the city of Stockton bankrupt.

A U.S. bankruptcy judge has officially accepted a Chapter 9 bankruptcy application from the city of Stockton, California, making it the most populous American to successfully file for bankruptcy.

The ruling, issued by U.S. Bankruptcy Judge Christopher Klein, could likely set a new legal precedent which could provide financially strapped cities and municipalities with an alternative to massive tax hikes coupled with drastic cuts to basic city services. Several other debt-ridden American cities are likely watching this story closely as they seek similar relief from their creditors. The court ruling will now protect the city of Stockton from lawsuits by creditors and will allow it continue providing basic services to its citizens while it reorganizes its debts.

While the Chapter 9 bankruptcy proceedings will provide some financial breathing room for Stockton, the city will still be required to pay a fraction of the $165 million they borrowed from Wall Street creditors in 2007 to fund payments into their state pension plan. Stockton’s creditors argued that the city failed to take every possible measure to raise taxes or further cut city services to make its payments. Creditors also pointed out the city’s lifetime health care benefits for employees plus one dependent, regardless of how long the employee worked for the city.

However, Judge Klein sided with the city of Stockton stating:

“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…”

Stockton’s creditors will likely continue to pursue every legal channel to oppose this new ruling.

Stockton owes approximately $900 million to the California Public Employees’ Retirement System to cover pension payments for its employees. So far, they have managed to remain current on these payments.

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