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July 21, 2013

K-12 Tax & Spending Climate: Detroit, tip of a vast pensions liability iceberg

Heidi Moore:

Detroit's filing of the biggest municipal bankruptcy in US historycaps three decades of the city's steady decline, characterized by crime, shrinkage of auto manufacturing industry, and a population all too eager to leave for the more hospitable suburbs.
Detroit's bankruptcy is, primarily, a lesson in how cities and states cannot avoid their pension responsibilities without a backlash of biblical proportions. In 2006, Detroit, like many other cities and states, was facing a $1.5bn gap in its pension payments to its public employees. As Quartz noted:

The city converted them into debt called "certificates of participation", or COPs, which it sold through a legally separate financial vehicle at a floating interest rate. Then it entered into a swap with UBS that converted those to fixed rates. This swap became very expensive when rates dropped after the financial crisis. A very similar arrangement led to the Jefferson County bankruptcy, and a massive scandal that sent several financiers to jail.

Posted by Jim Zellmer at July 21, 2013 12:12 AM
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