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Detroit Bankruptcy Filing Part of a Trend?

People are watching the Detroit bankruptcy filing carefully, wondering whether it is the start of a trend for other cities and municipalities in financial trouble – many driven by underfunded pension plans. Many state and local pensions have either invested poorly or have not realistically calculated their liabilities using fuzzy math, and according to a New York Times article, some are guilty of both.

Either taxes have to rise to make up the deficit or pensioners’ benefits will be cut. In either case, the cost of borrowing will be even more expensive with the threat of bankruptcy looming and lenders concerned about their rights compared to pensioners’ rights.

A Michigan state court has ruled that the recent Detroit bankruptcy filing violates the state constitution; the bankruptcy court in the Stockton, Calif. case has to determine whether pensioners have to take a haircut like other creditors.

Either way, the Detroit filing is a wake-up call to the realities that many state and local entities cannot afford to fulfill their promises to pensioners without raising taxes (which may have to go up anyway to pay higher interest rates from lenders concerned about recent trends like the Detroit bankruptcy filing).

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