The recent bankruptcy filing by the city of Detroit has received plenty of attention in the press and the markets. There is a great deal of uncertainty as to how the action will proceed and who the biggest losers will be when the dust clears. The high-profile case gives advisers a good opportunity to communicate with their clients about issues that may be very important to their financial goals – municipal bond, pensions, and retiree health benefits come to mind.
For example, one approach advanced for handling the city’s pension obligations has been to characterize unfunded pension liabilities as if they were general unsecured creditors and thus subject to enormous cuts, as much as ninety percent. If that were to be the case, how might retirees handle this blow to their retirement finances? This is a question you should be raising with any of your clients who are dependent on public pensions, particularly in states with large unfunded liabilities.
The potential for cuts in retiree health benefits – one we’ve often seen in large businesses – will similarly pose a problem for any of your clients who are caught up in a municipal bankruptcy or even a lesser restructuring. We’ve also seen the impact on the municipal bond market by the mere threat that investors in city bonds might take substantial reductions in the value of their interests. This risk traditionally has been felt to be low but in recent years the threat of Greece-like restructurings and other cuts has been growing.
If anything, the Detroit filing serves as a wake-up call for those of your clients who may be vulnerable due to their investments in municipal bonds or their receipt of pension payments from a troubled municipality. Even where you and your clients are confident about the situation as it stands today, it is always beneficial to review options and perform a “worst-case” analysis to lessen potential future pain