The California Public Employees' Retirement System won't be allowed to sue San Bernardino, Calif., to collect more than $5 million owed by the insolvent city, a judge ruled Friday.

U.S. Bankruptcy Judge Meredith M. Jury made the ruling at a court hearing in Riverside, Calif., that is being watched by other cities struggling with high pension costs across the country. If CalPERS is allowed to sue and wins a monetary judgment, "the impact on the city's ability to reorganize would be astronomical," she said.

The judge sided with San Bernardino and its bondholders, who claim the city can't afford to fund vital public services and also pay past-due obligations to CalPERS, the biggest U.S. public pension fund.

"This city has limited funds and at the present time is using those limited funds to pay salaries to city employees who are providing services today," Jury said. Forcing payments to CalPERS "would be the death knell" for the city, she said.

The ruling may set a legal precedent at a time when pensions for public employees are straining local governments from California to Rhode Island, according to bankruptcy attorneys that specialize in municipal insolvencies.

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