The City of Detroit’s bankruptcy is shedding light on the security of various forms of municipal debt. In our opinion, one of the central arguments of the bankruptcy proceedings is the security of voter-approved unlimited tax general obligation (UTGO) debt versus pension liabilities. The last few weeks of mediations provided much needed guidance on this discussion. First, UTGO bondholders reached a preliminary settlement of a 74-cents-on-the-dollar recovery rate for their bonds, versus an initial offer of only 15 to 20 cents on the dollar. The outcome of the settlement is a credit positive for UTGO bondholders and the UTGO segment of the municipal market. Furthermore, the agreement supports the idea that voter-approved UTGO debt is more secure than other forms of GO debt. Second, the UTGO preliminary agreement hinges on the various Detroit pension funds receiving support from the State of Michigan and private foundations, as well as revisions to cost of living adjustments and slight pension reductions for certain classes of civil servants. What this means to us is that UTGO debt and pension liabilities are, at least, equally secured and GO bonds with less security are subordinate to both. The consequences of the decisions are far reaching and tells us that, as credit analysts, we need to look at an entity’s total bonded debt and pension liability exposure. There is additional evidence to support this methodology. Recently, pension reforms in Rhode Island and Puerto Rico have been struck down by their state supreme courts for either being unconstitutional or subverting the legal process. These rulings show that it is difficult to reduce pension liabilities and subsequently makes the pension contract a hard liability similar to bonded debt. SNWAM feels we are ahead of the market when analyzing credits in this manner. For the past few years, we have been combining bonded debt and pension liabilities to determine the total debt impact on the credits in our universe and thereby selecting credits that manage their total liability the best. Moreover, at the beginning of the year, Moody’s credit rating agency adjusted their municipal GO rating methodology so that contribution to the credit rating from debt and liability management increased in importance to 20% from 10% and economic attributes by decreased by 10%. In all, SNWAM is ahead of the market when analyzing the impacts of pension liabilities on a credit’s ability to repay bonded debt and our portfolios are well positioned for the credit challenges ahead.