The four-day federal trial will determine whether Stockton is eligible for Chapter 9 bankruptcy protection. It could also decide a battle between Wall Street creditors and the California Public Employees Retirement System.
CalPERS believes it must be paid under state law, and the city is seeking relief from other creditors while maintaining payments to the pension fund. If the bankruptcy judge sides with Wall Street, other local governments with pension liabilities could take notice. "They're looking for avenues that might help them with these costs in the future and wondering whether this is an option for them," says University of the Pacific economist Jeff Michael.
Chris McKenzie with the League of California Cities says he thinks cities will shy away from bankruptcy no matter how the Stockton case turns out. "Most city officials have told me they will move heaven and earth to avoid having to do this."
If the judge bars Stockton from bankruptcy, the city would likely face some combination of tax increases, deeper budget cuts - and, perhaps, reductions in its CalPERS payments.