Unlike Stockton, Detroit targets pensions on its way to probable bankruptcy

For Stockton residents depressed about their bankrupt city, I recommend a review of Detroit's emergency managers proposal to creditors of the losses they should take to help the city avoid bankruptcy.  Detroit defaulted on its pension bonds this month, a little more than a year after Stockton first defaulted on its bonds. Other parts of Detroit's dilemma will be familiar to Stocktonians: low levels of public service, high crime, and poverty.

But the driver of Detroit's municipal distress is quite different than Stockton.  Detroit's biggest fundamental problem is unrelenting large-scale population decline, as people abandon the City for its safer, lower tax suburbs.  Stockton continues to grow, albeit much slower than in the past.  Stockton also has lower current tax rates than Detroit, and is likely to use a tax increase to help itself escape bankruptcy.  Detroit can't realistically raise taxes any higher (property tax rates are about 6 times higher than California, there is a municipal income tax, and more) as there is evidence that its high taxes are part of what has been driving residents to the suburbs.

Also different is the proposed approach to the City for financial restructuring, and this is what will demand the most headlines and has the greatest potential implication for Stockton's case.  Like Stockton, Detroit's emergency manager proposed big losses for the unsecured bonds, but is taking a dramatically different approach in proposing significant cuts to vested pension benefits, which he views as unsecured debt.  Stockton has wiped out retiree medical benefits, but is not proposing to change pensions.  It should be noted that the proposal to cut pensions in Detroit isn't coming from its elected officials or a city manager hired by an elected city council.  The Governor of Michigan appointed an emergency manager for the City, and it is the appointed emergency manager that is targeting pensions.

Michigan's state constitution protects pensions, similar to California, so I doubt Detroit's unions will go along with this pre-bankruptcy proposal and will try to defend their pensions in bankruptcy court.  Thus, Stockton may not be the nation's largest bankrupt city for much longer.