California Bankruptcies May Offer Detroit Lesson

April 2, 2013 – In The News
The Detroit News

The California city of Stockton became the nation's largest municipality to enter bankruptcy in a case being closely followed in Detroit to see how retirees and creditors make out.

U.S. Bankruptcy Judge Christopher Klein issued the bankruptcy protection declaration over the objections of the city's bondholders, who challenged Stockton's eligibility for bankruptcy because the city has continued to make its pension payments and not paying other creditors.

The judge signaled Monday that he may not allow the city to choose pensioners over bondholders when it submits its restructuring plan, said Michael A. Sweet.

"What he's staying is 'Hey city, I won't approve your plan if I find it unfairly discriminates against other creditors,'" Sweet said.

Also in question is how state laws could affect any bankruptcy proceedings. California state law protects pensions, Sweet said. In Michigan, however, the state constitution protects public sector pensions but not retiree health insurance benefits, which account for $5.7 billion of Detroit's unfunded liabilities.

Sweet said Detroit emergency manager, Kevyn Orr, may want to take note of how the judge handles the Stockton case if it offers "a glimmer of hope for a restructuring concept that will work in Detroit" without going into bankruptcy.