In part four of The Bond Buyer’s series of articles about municipal pensions, the article reviews the balance between pensions and bonds during municipal bankruptcy.
In the Detroit bankruptcy public safety monthly checks were left intact and cut 4.5% from general employees. Cost-of-living increases were reduced or eliminated. Health-care benefits were cut nearly 90%. Unlimited-tax GO bonds were cut 26% and limited-tax GO bonds were cut 66%. Holders of certificates of participation were cut 86%. The bankruptcy judge determined this was fair and equitable due to the Michigan state constitution’s protections of the retirement obligation.
In recent California municipal bankruptcies (Vallejo, Stockton and San Bernardino) pension funds received a 100% recovery while bondholders received anywhere from 40% to 60%.
Moody’s commented, “The standing of bondholders versus pensioners in a municipal bankruptcy can be ambiguous because pensioners may have additional legal and political protections that are superior to bondholders.”
