Judge Allows Bankruptcy for Stockton, Calif.

But will city employee pensions be protected?

Stockton, Calif., successfully fought off Wall Street creditors for the power to restructure its debt in Chapter 9 bankruptcy, but a bankruptcy judge signaled the city may have to find financial stability in an unprecedented place: its pension fund.

At a court hearing Monday, Judge Christopher Klein of the U.S. Bankruptcy Court in Sacramento refused to dismiss the city's Chapter 9 case, saying that it "will not be able to perform its obligations to its citizens relating to such fundamental matters as public safety, as well as other basic governmental services, without the ability to have the muscle of the contract-impairing power of federal bankruptcy law."

Stockton, a city of 300,000 residents 80 miles east of San Francisco, sought Chapter 9 protection last June 28, making it the largest-ever U.S. city to file for bankruptcy. At the time, Stockton's leaders said the city risked being short of cash to make its payroll three weeks later.