Wednesday, December 04, 2013

Detroit bankruptcy said to said new legal precedent in ability to cut back pensions, stiff bondholders

Federal bankruptcy law will trump over Michigan state law protecting pensions, but a Detroit Free Press (Gannett) article about the options available to emergency Kevyn Orr leave a lot of wiggle room for how pensions would be affected.  There could be a means-testing concept, or police and fire unions might fare better.  The Free Press analysis is here
The Washington Post on December 4, in a detailed story by Michael A. Fletcher and Reid Wilson, reported “Detroit eligible for bankruptcy filing; pension ruling could set precedent; unions vow to fight plan to shed $18 billion debt”, link here.  The story indicates that Judge Rhodes is setting a precedent in allowing municipal worker pensions, including those already retired, to be cut, as well as stiffing bondholders.  The main story is here  and there is some supplementary video.
There have been some other spectacular bankruptcies, such as Stockton CA, as reported by Morgan Spurlock.
Anthony Bourdain recently covered the plight of Detroit in his "Parts Unknown" series for CNN.  The city went into rapid decline after riots in the late 1960's, followed by departure of many employers to the suburbs or to southern cities or overseas.  

Retirees who hold a lot of tax-free municipal bond funds could see values go down, as more funds are seen as possibly at risk.  Less risky are holdings of specific securities, where the retiree or investment advisor knows the reputation of the local government or utilities authority

I visited the city on a Sunday morning in August 2012 and found the downtown area (near the new stadium for the Tigers) kept up, and did not see the blighted areas that are widely reported.  

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