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This week, the city of Stockton in California's Central Valley has been all over the news.
(SOUNDBITE OF NEWS MONTAGE)
UNIDENTIFIED MAN #1: The city of Stockton, California.
UNIDENTIFIED MAN #2: Stockton, California.
UNIDENTIFIED WOMAN: Stockton, California, is this country's biggest city to go bankrupt.
UNIDENTIFIED MAN #3: It's official. Stockton, California, has officially gone bust.
SIEGEL: A federal judge this week decided to allow the city's bankruptcy go forward, and that sets the stage for an important fight about bankruptcy, bond holders and the state's huge public pension fund. NPR's Richard Gonzales reports.
RICHARD GONZALES, BYLINE: Stockton is the largest city in America to go bankrupt. The city is more than a billion dollars in debt. U.S. bankruptcy Judge Christopher Klein ruled this week that the city needed the power to restructure its debts, otherwise it wouldn't be able to meet its basic obligations, such as providing fire and safety protection. Now Stockton has to come up with a bankruptcy plan, and financial and municipal experts around the country are watching.
ROBERT FLANDERS: The real issue in this case is whether a city or town who wants to go into bankruptcy must treat all of its creditors in the same way and impair them equally.
GONZALES: Robert G. Flanders Jr. is a former state receiver for the bankrupt city of Central Falls, Rhode Island.
FLANDERS: Who do they propose to give haircuts to and who do they propose to leave intact and not touch?
GONZALES: For now, Stockton has stopped making payments to Wall Street creditors who bought or insured its bonds. At the same time, it has continued making payments to its largest creditor, the California Public Employees Retirement System or CalPERS. That has set up a conflict between federal bankruptcy law that says all creditors should be treated equally and state law that protects pensions.
DAVID SKEEL: CalPERS has state law backing it.
GONZALES: David Skeel teaches law at the University of Pennsylvania.
SKEEL: California state law at least purports to absolutely protect pensions. And what CalPERS has been saying and will continue to say is that can't be violated even in bankruptcy. Obviously, the bond insurers and some of the other creditors of Stockton don't agree with that.
GONZALES: The Wall Street bondholders say federal bankruptcy law trumps state law. Skeel adds that there are few legal precedents guiding the court that will ultimately have to decide and that's why the case has drawn so much attention around the country. Attorney Robert Flanders says that's how it should be. The baby boomer generation is aging and retiring and that's a huge concern everywhere.
FLANDERS: So the pressures are mounting on communities across the country in terms of how do we pay for these obligations that we entered into that we now find we can't afford. So these are very difficult decisions, but they are by no means limited to Stockton or California.
GONZALES: In the next few months, Stockton will offer the court its re-organization plan. Judge Klein indicated that, ultimately, the city may have to cut pension payments. Many legal experts expect a long court battle. Richard Gonzales, NPR News. Transcript provided by NPR, Copyright NPR.