Municipal Bankruptcies Pit Pensioners, Bondholders Against Each Other

Municipal Bankruptcies Pit Pensioners, Bondholders Against Each Other

Several cities have sought bankruptcy law protection under Chapter 9 of the Bankruptcy Code in recent months. A new analysis suggests that as the number of municipal bankruptcies in the U.S. increases, pensioners and bondholders may be in the center of the fight, according to Forbes.

Following Judge Christopher Klein’s decision to allow Stockton, California, to proceed with its bankruptcy petition, he noted the case would have large implications and that he would have to enter into unfamiliar territory regarding how to manage pensions and bondholder claims. Forbes reported there is a great deal of ambiguity regarding whether promises made to state-run pension systems should be honored above contracts from bondholders who loan cities money.

Further, judges who preside over municipal bankruptcies have considerably less authority in dictating how a city must manage its assets during proceedings than they would if presiding over a corporate bankruptcy.

To date, pension issues have been a central factor in recent municipal bankruptcies, including those in Central Falls, Rhode Island, and an upcoming case in Georgia.

William Rizzo of MBIA, a company that insures municipal bonds, told Forbes that the economic collapse is likely to lead to a string of municipal proceedings that will impact the nation as a whole.

“We’re certainly seeing stress across the country,” Rizzo told the news source. “The whole country’s feeling it.”