According to Fitch Ratings, the December 3 ruling by a federal bankruptcy court judge that the city of Detroit is eligible for Chapter 9 was not a surprise, although the ruling regarding pension obligations provided unexpected clarity to a question that has puzzled many municipal market participants.

The ruling on pensions follows a similar finding by the judge in the Stockton, Calif., bankruptcy case, who concluded in his August 6, 2012, opinion that even if post-employment health benefits were a vested right under the California constitution, they would not be protected in bankruptcy. This reasoning could also be extended to pension benefits, but that remains an open question in California.

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