...The rulings in the Detroit and Stockton bankruptcies that the cities' plans of adjustment (POAs), as required by Chapter 9 of the U.S. Bankruptcy Code, are "fair and equitable" raise questions for Fitch Ratings about the potential treatment of bondholders relative to other creditors in any future municipal bankruptcies. Outcomes Difficult to Predict: Fitch believes public policy rather than legal constructs were a significant factor in the outcomes of both the Detroit and Stockton bankruptcies. Negotiated settlements with creditors form the basis of the ultimate POAs for both cities. Without a definitive legal framework upon which to rely, Fitch believes it will be difficult for municipal investors to predict the outcome of any future potential bankruptcies of a municipal government. Work Force the Priority: In both the Detroit and Stockton cases, the judge opined that pensions could be reduced in bankruptcy. However, Stockton's judge ruled that a POA with no pension payment impairment...
