Finance

Detroit's Bankruptcy Doesn't Mean More Cities Will Follow

With every municipal bankruptcy, there usually comes the chorus of warnings that more cities will join.
December 13, 2013
The domino effect.
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With every city bankruptcy development, there usually comes the chorus of warnings that more cities will join. But Detroit’s approval last week to enter Chapter 9 protection should not be reason for investors – or anyone else for that matter – to worry that more cities will follow, one analyst says.

“I don’t view it as something that entities are going to use to solve their [budget] balances,” said Jane Ridley, Standard and Poor’s senior director of U.S. Public Finance, during a conference call with reporters Thursday.

It’s a common, knee-jerk reaction when big news comes down the pipe regarding a city bankruptcy – will more localities follow? Last week, the Detroit Free Press noted that unions fear Chapter 9 “may become a more viable option for distressed municipalities,” especially those looking to restructure their pension payments to retirees. (U.S. Bankruptcy Judge Steven Rhodes ruled that Detroit can cut its pensions as part of its restructuring.)

And this week, finance columnist Michael Lombardi had this to say: “At the very core, the ruling that lets Detroit enter into bankruptcy has given cities who are struggling with budget deficits, pension deficits, and massive debt loads an easy way out. They can simply follow in Detroit’s footsteps.”

But Ridley notes that Detroit’s fall was a long time coming. Its credit rating, for example, had fallen below investment grade nearly five years ago. And bankruptcy, she added, is not an easy out.

“It is a long and costly process,” she said, adding that Detroit has already spent roughly $19 million during the first three months of bankruptcy. “Even if the plan [of adjustment] is filed in January, it still is expected to take some time. More money will be spent and it’s going to cost in hard and soft costs.”

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