The case is being watched closely because it could answer the significant question of who gets paid first by financially strapped cities — retirement funds or creditors.

If the judge rules that the city should have used the bankruptcy process to trim financial obligations to the California Public Employees' Retirement System, that could have ramifications for Stockton and other cities struggling to pay bills and pension costs.

Before the recession, leaders spent millions of dollars revitalizing the downtown area by buying a new City Hall and building a marina, sports arena and ballpark. The city issued about 3,000 permits annually to build new homes, and it paid police premium wages and health benefits.

With the recession, building dried up, and Stockton became ground zero for home foreclosures. Like many residents, City Hall couldn't pay its bills. The city slashed millions of dollars from its budget and laid off 25 percent of its police officers. Crime soared.

The city about 80 miles east of San Francisco is asking Judge Klein to approve its plan for reorganizing more than $900 million in long-term debt, while Franklin Templeton Investments wants the judge to reject the proposal.

The city has reached deals with all of its major creditors, except for Franklin, which took Stockton to trial.

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