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Is Chicago the Next Detroit?

Is Chicago the Next Detroit?

When the city of Detroit filed for bankruptcy protection last month, the news was delivered more as a sad but unsurprising anecdote at the end of a long list of bad luck from a city that wears its toughness on its sleeve.

Some even went as far as labeling the Motor City's historic, unprecedented collapse as a turning point rather than a flash point, that marks Detroit's first real step towards recovery, rather than the catalyst for copycat filings by other cities and towns in the state and region.

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While parallels have been drawn between Detroit and Chicago for their huge unfunded pension liabilities, Jack Ablin of BMO Private Bank says his hometown is in an entirely different position.

"Chicago has similar obligations, but I don't think the problems are the same," he says, noting that Chicago's population is stable and growing and real estate prices are rising, whereas Detroit's demise has been a slow and steady decline that started in the 1970s.

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To be sure, the way in which Detroit decides to deal with its problems and obligations will have an impact and set legal precedence for other ailing cities, when it reveals its plans to a judge at the end of the year. But even now, Ablin says he can see the effect of Detroit spilling over to Illinois."We are on an unsustainable track here in Chicago," he says, "but I sense an urgency to change that track now from lawmakers."

While budget cuts and dramatic increases in property taxes are being whispered about in Chicago as a way to close a multi-billion dollar IOU the city has to retired teachers and fire fighters, oddly, it may be the red hot stock market that ultimately bails out the pension funds, as new research show the funds averaged 12% gains, their best annual returns in two years.

In addition, some investors say the first by-product of this turmoil has been opportunity in the tax-free municipal bond market. "There are just huge opportunities," Ablin says, pointing out that each city has its own unique set of problems.

While some investors have bailed on the muni market all together, Ablin says that move would be a mistake. "Keep in mind that there are 10,000 different municipal bond issues," for all types of investors, he says, not just Detroit's.

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