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Judge OKs Stockton, Calif., bankruptcy bid

Last June the local paper in Stockton, Calif.,

Last June the local paper in Stockton, Calif., headlined what was coming. On Monday, a federal judge approved Chapter 9 protection. (June 27, 2012) Credit: Getty

A judge accepted the California city of Stockton's bankruptcy application Monday, making it the most populous city in the nation to enter bankruptcy.

U.S. Bankruptcy Judge Christopher Klein said the bankruptcy declaration was needed to allow the city to continue to provide basic services.

"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," Klein said.

The city of nearly 300,000 people has become emblematic of government excess and the financial calamity that resulted when the nation's housing bubble burst. Its salaries, benefits and borrowing were based on anticipated long-term developer fees and rising property tax revenue. But those were lost in a flurry of foreclosures beginning in the mid-2000s and a 70 percent decline in the tax base.

The city's creditors wanted to keep Stockton out of bankruptcy -- a status that will likely allow the city to avoid repaying its debts in full. They argued the city had not cut spending enough or sought a tax increase that would have allowed it to avoid bankruptcy.

Matthew Walsh, an attorney for the bond holders, declined to comment.

Attorneys for the city said the city's budget and services had been cut to the bone.

"There's nothing to celebrate about bankruptcy," said Bob Deis, Stockton's city manager. "But it is a vindication of what we've been saying for nine months." The Chapter 9 case is being closely watched nationally for potential precedent-setting implications.

By 2009 Stockton had accumulated nearly $1 billion in debt on civic improvements, money owed to pay pension contributions, and the most generous health care benefit in the state -- coverage for life for all retirees plus a dependent.

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