Published: Apr 01, 2013 7:16 AM EDT
Updated: Apr 01, 2013 1:21 PM EDT

SACRAMENTO, Calif. (AP) - A federal judge is set to rule on whether Stockton will become the most populous city in the nation to enter bankruptcy protection.
 
The Chapter 9 bankruptcy case is being closely monitored for the potential precedent-setting implications: whether federal bankruptcy law trumps the California law that says debts to the state pension fund must be honored.
 
Stockton is seeking to default on $165 million it borrowed in 2007 to pay its CalPERS pension obligations. Those creditors argued in court last week that it's unfair for them to lose money while the retirement fund negotiated in flush times remains untouched.
 
Pension obligations are Stockton's biggest debt.
 
Legal observers say this first-ever bankruptcy case to challenge state pension law will likely be appealed.