Many retirees are keeping an eye on Detroit these days. Usually their eyes are on the Big 3 automakers. Auto sales are up and the automakers have reason for optimism. The City of Detroit is another matter. The city is filing for bankruptcy protection. Retired municipal employees are surely concerned. Most accepted lower wages with the understanding that a secure retirement awaited them. If benefits are cut, they cannot undo a major decision made decades ago.
Many investors are also in uncharted territory. Municipal bonds are considered one of the safest of all investments. Defaults are so infrequent investors rarely even consider the risk of default. Tax free municipal bonds are the basis of many portfolios. Vermonters who must pay state income tax in addition to IRS liabilities join those in other states as beneficiaries of this tax free income.
The Detroit situation has been building for years. A shrinking industrial core led to a smaller population. Less people leads to fewer small businesses and even lower tax revenues. Bankruptcy is far from certain at this point. Creditors may step forward to get a smaller piece of something as opposed to nothing. The courts may order a reorganization of sorts in the interim.
Many cities, especially those in the Rust Belt face similar challenges. If you are a stake holder, there is reason for concern. There is no need to panic. There are protections built into the law. Bankruptcies on the municipal level are very rare. If you have questions about how this may affect your estate, you should contact an estate planner with the expertise to evaluate your position.