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Balancing the Equities in Municipal Bankruptcies

By Mark S. Kaufman

When it comes to explaining what has prompted the incidence of financial distress being experienced by an increasing number of our nation's cities, perhaps the most persistent and significant cause is a troubled city's obligations to fund substantial pensions for its employees, both retired as well as its active work force.

It is in this context that the recent rulings regarding pension liabilities in the Detroit and Stockton, CA, bankruptcies have taken center stage. Legal issues surrounding whether pension benefits can be modified under our bankruptcy laws, even in the face of state constitutional protections that would otherwise preclude the abrogation of promised retiree benefits to public employees, are now front-page news. But more recently, the focus has shifted from whether pensions can be impaired to a more complex set of questions about when and to what extent such modifications should be required for a fiscally challenged city to successfully garner a court's confirmation of a Chapter 9 plan of adjustment. More than any other set of legal issues arising in the municipal distress context, it is fair to say that the treatment of pension liabilities has quickly become the most significant focus of creditor constituencies and their professionals.

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