In Embattled Detroit, No Talk of Sharing Pain J.D. Pooley/Getty Images A bankruptcy in Detroit would have no precedent, despite an unusual flurry of municipal bankruptcies after the financial crisis. When New York City threatened to declare bankruptcy in 1975, the idea so terrified everyone that it forced the city, its workers and its recalcitrant bankers to sit down and find ways to share the pain. Rebecca Cook/Reuters Kevyn Orr Detroit's emergency manager, estimated the embattled city's shortfall on pension liabilities is around $3.5 billion, not $644 million as estimated before. Now another large city, Detroit, appears to be on the brink of filing for bankruptcy, but there is little talk of sharing the pain. Instead, the fiscal crisis in Michigan is setting up as a gigantic clash between bondholders and city retirees. The city's proposals, which could give some bondholders as little as 10 cents on the dollar, are making some creditors think they would be better off in bankruptcy. They see the specter of a federal judge imposing involuntary losses as less ominous than it was for New York. "The haircut is so severe," said Matt Fabian, a managing director of Municipal Market Advisors, "I think it's scaring them into bankruptcy, rather than away from bankruptcy." But city retirees, facing the prospect of sharply reduced benefits whether in bankruptcy or under Detroit's restructuring proposal, think they stand squarely on the moral high ground because despite the poverty of many current and retired members, they have already offered big concessions. "It's not the employees that are costing the city money," said Edward L. McNeil, an official with the American Federation of State, County and Municipal Employees who is leading a coalition of 33 unions that will be affected by any restructuring of Detroit's debts, which total roughly $17 billion. Just last year, he said, those unions offered concessions that could have saved the city hundreds of millions of dollars a year. But Detroit "botched the implementation," he said. And Michael VanOverbeke, interim general counsel for the general workers" retirement plan, said bondholders were investors hoping for returns, who should expect "a certain amount of risk." "Planning for retirement and working for employers was not an investment into the market," he added. These are people who are on a fixed income at this point in their life. They can't go back to work and start all over again. He said it was unthinkable to cut retirees" pensions outside of bankruptcy. Rhode Island hurriedly passed a law giving municipal bondhholders priority over other creditors, including retirees, just before the small city of Central Falls filed for bankruptcy. That helped Central Falls resolve its bankruptcy quickly, but no one thinks Michigan could pass such a law. In Jefferson County, Ala., a large majority of the financial trouble grew out of debt issued to rebuild a sewer system, not pensions or other employee benefits. The rights of public workers and bondholders are in conflict in the bankruptcy of Stockton, Calif., but that case is not yet far enough along to be of any guidance to Detroit. With talks on labor issues scheduled for Thursday, municipal bond market participants say one of their main concerns is that the city's proposal would flatten the traditional hierarchy of creditors, putting say, a retired librarian on par with an investor holding a general obligation bond. That does not square with the laws and conventions of the municipal bond market, where for decades small investors have been told that such bonds are among the safest investments and that for "general obligation" bonds cities could even be compelled to raise taxes, if that's what it took to make good. The "full faith and credit" pledge was supposed to make such bonds stronger than the other main type of muni - revenue bonds, which promised to pay investors out of project revenue. Public finance experts have warned that broad societal problems could follow a loss of faith in municipalities" commitments to honor their pledges. In a major report on the state of the muni market last year, the Securities and Exchange Commission warned that communities would find it increasingly costly to raise money, throwing into question the time-honored practices of building and financing public works at the local level.