A federal judge ruled Monday that Stockton is eligible for bankruptcy protection, over the objection of creditors who argued the city could come up with more money.
U.S. Bankruptcy Judge Christopher Klein said Stockton can move forward with a plan to reorganize debt. He twice stated that the creditors had acted in bad faith and had refused to pay their share of the costs for negotiations.
The case could set a precedent as many municipal governments are struggling to pay creditors in the aftermath of the Wall Street created 2008 financial crisis.
In late June, Stockton became the nation’s largest city to fail financially. At that time, all eyes were on the port city of 300,000 as experts warned the action could set off a string of similar filings among cash-strapped municipalities. Since then, a half-dozen cities have filed for Chapter 9 protection under the U.S. Bankruptcy Code, including the city of San Bernardino.
While there is some debate the general consensus is Stockton is going bankrupt due to the poor economy and high compensation agreements with public employees. The next step for Stockton, according to Reuters’ Cate Long, may be an attempt to renegotiate or even default on pre-existing agreements with CalPERS to reduce the city’s pension liability
No matter what happens next it seems other cities (Detroit for example) might be viewing the Stockton bankruptcy as a path worth taking to escape creditors.