17 June 2013

Detroit Following Stockton's Footsteps

I've posted here about Detroit's need to reduce its pension and health care benefits for retirees. And I've noted here that Stockton, California has stopped paying its bondholders in part so it can continue to pay its retirees' pensions. It now seems that Kevyn Orr, Detroit's emergency manager, is taking a page from Stockton's playbook and choosing to default on its bond debt. You can read about it on Reuters (paywall, perhaps) here.

What struck me as beyond cavil only months ago--that cities would use Chapter 9 of the Bankruptcy Code to jettison burdensome, above-market pension obligations-- has turned out to be far from the case. Instead of cutting retirees (many of whom still vote), Stockton and now it appears Detroit are turning their guns on far-away bondholders.

While the long-term ramification of this approach are still unclear, this turn of event is occupying my summer research agenda. Stay tuned.

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