Debt Crisis

CBO: Updated 2014-2024 Budget Projections Show Substantially Rising Budget Shorfalls, Federal Debt

That idea that the U.S. could someday resemble a “banana republic” might not be too far off the mark. From the non-partisan Congressional Budget Office website today:

As it usually does each spring, CBO has updated the baseline budget projections that it released earlier in the year…

Between 2015 and 2024, annual budget shortfalls are projected to rise substantially—from a low of $469 billion in 2015 to about $1 trillion from 2022 through 2024—mainly because of the aging population, rising health care costs, an expansion of federal subsidies for health insurance, and growing interest payments on federal debt. CBO expects that cumulative deficits during that decade will equal $7.6 trillion if current laws remain unchanged. As a share of GDP, deficits are projected to rise from 2.6 percent in 2015 to about 4 percent near the end of the 10-year period. By comparison, the deficit averaged 3.1 percent of GDP over the past 40 years and 2.3 percent in the 40 years before fiscal year 2008, when the most recent recession began. From 2015 through 2024, both revenues and outlays are projected to be greater than their 40-year averages as a percentage of GDP (see the figure below)…

In CBO’s baseline projections, federal debt held by the public reaches 78 percent of GDP by 2024, up from 72 percent at the end of 2013 and twice the 39 percent average of the past four decades (see the figure below). As recently as the end of 2007, federal debt equaled just 35 percent of GDP

Such high and rising debt would have serious negative consequences. Federal spending on interest payments would increase considerably when interest rates rose to more typical levels. Moreover, because federal borrowing would eventually raise the cost of investment by businesses and other entities, the capital stock would be smaller, and productivity and wages lower, than if federal borrowing was more limited. In addition, high debt means that lawmakers would have less flexibility than they otherwise would to use tax and spending policies to respond to unexpected challenges. Finally, high debt increases the risk of a fiscal crisis in which investors would lose so much confidence in the government’s ability to manage its budget that the government would be unable to borrow at affordable rates…

(Editor’s note: Bold added for emphasis)

You can read the entire assessment and view the complete document on the CBO website here.

By Christopher E. Hill
Survival And Prosperity (www.survivalandprosperity.com)

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Chicago Public Pension Crisis Latest

Last Tuesday, I blogged about Chicago Mayor Rahm Emanuel’s attempt to address some of the City’s public pension woes via larger contributions by City employees and $50 million tax increases for five straight years- beginning next year and continuing through 2019- for Chicago property owners.

There’s been a lot of chatter regarding this proposal and other pension “reform” activity today. Karen Pierog reported on the Reuters website:

Legislation to ease funding shortfalls in two of Chicago’s four retirement systems is a modestly positive credit step but not a permanent fix, Moody’s Investors Service said on Monday

Moody’s said that if enacted into law, the measure would immediately reduce the unfunded liabilities in the two funds.

“However, we expect that the (liability) would then escalate for a number of years before declining. Accrued liabilities would exceed plan assets for years to come, and if annual investment returns fall short of the assumed 7.5 percent, the risk of plan insolvency may well reappear,” the credit rating agency said in a report…

After breezing through an Illinois House committee on April 2, the bill has stalled. Moody’s said that even if the bill makes it out of the legislature, Governor Pat Quinn must sign it. The law would then face potential challenges to its legality under the Illinois constitution, which prohibits the impairment of retirement benefits for public sector workers…

(Editor’s note: Bold added for emphasis)

So will the Illinois Governor and fellow Chicago Democrat sign off on Mayor Emanuel’s proposed legislation?

John Byrne and Monique Garcia reported on the Chicago Tribune website this afternoon:

Gov. Pat Quinn today came out against Mayor Rahm Emanuel’s plan to raise Chicago property taxes and cut retirement benefits as a way to shore up some of Chicago’s government worker pension systems.

The re-election seeking Democratic governor called the bill floating around Springfield “a sketch” that “kept changing by the hour” and blasted the property tax as a “lousy tax” because it is not based on the ability to pay…

“I don’t think that’s a good way to go,” Quinn said of hiking property taxes. “And I say it today and I’ll say it tomorrow, they’ve got to come up with a much better comprehensive approach to deal with this issue. But if they just think they are going to gouge property tax owners, no can do. We’re not going to go that way.”

(Editor’s note: Bold added for emphasis)

Now, as I pointed out in last week’s post about Chicago’s public pension crisis:

There’s still a state-required $600 million contribution due next year from the City to stabilize police and fire pension funds that this proposed property tax hike doesn’t address and has to be dealt with…

(Editor’s note: Bold added for emphasis)

Plus, I read the following this morning by Chacour Koop on the website of The State Journal-Register (Springfield):

After addressing Illinois’ own employee pension crisis, lawmakers now face an equally challenging task with the state’s cities, as mayors demand help with underfunded police and firefighter pensions before the growing cost “chokes” budgets and forces local tax increases.

The nine largest cities in Illinois after Chicago have a combined $1.5 billion in unfunded debt to public safety workers’ pension systems. Police and fire retirement funds for cities statewide have an average of just 55 percent of the money needed to meet current obligations to workers and retirees…

The problems — a history of underfunding, the expansion of job benefits and the prospect of crushing future payments — mirror those that Chicago Mayor Rahm Emanuel warned about when he asked the legislature for relief last week.

In 2016, state law requires cities to make required contribution increases — in some cases, more than an additional $1 million annually — so they’ll reach 90 percent funding by 2040. If they don’t, the state will begin doing it for them, diverting grant money now used by cities elsewhere directly into the pension funds…

(Editor’s note: Bold added for emphasis)

Just like the Illinois General Assembly- dominated by Democrats- barely passed legislation on December 3, 2013, that was touted as a “fix” for the state’s $100 billion public pension crisis (it isn’t), something tells me an accommodation may be reached with fellow Democrats running the City of Chicago so they don’t have to pay the full amount of the state-required $600 million contribution due next year to stabilize police and fire pension funds.

That goes for those large Illinois communities as well.

Watch all the back-patting go on should that “fix” materialize as well.

And the inevitable “blowback” down the road.

By Christopher E. Hill
Survival And Prosperity (www.survivalandprosperity.com)

UPDATE: From Fran Spielman over on the Chicago Sun-Times website early Tuesday morning:

Mayor Rahm Emanuel and House Speaker Michael Madigan Monday stripped out controversial language from city pension legislation that had authorized the City Council to impose a property-tax hike, putting the stalled measure back on the fast-track at the state Capitol.

Madigan, D-Chicago, filed an amendment to Senate Bill 1922 after the House adjourned Monday without taking any action on the stalled legislation. Sources now expect the legislation to be voted upon as early as Tuesday.

(Editor’s note: Bold added for emphasis)

Sources:

Pierog, Karen. “UPDATE 1-Proposed Chicago pension changes positive step but no fix -Moody’s.” Reuters. 7 Apr. 2014. (http://www.reuters.com/article/2014/04/07/usa-chicago-moodys-idUSL2N0MZ1AP20140407). 7 Apr. 2014.

Byrne, John and Garcia, Monique. “Quinn blasts Emanuel’s property tax hike for pensions.” Chicago Tribune. 7 Apr. 2014. (http://www.chicagotribune.com/news/politics/clout/chi-quinn-blasts-emanuels-property-tax-hike-for-pensions-20140407,0,5432729.story). 7 Apr. 2014.

Koop, Chacour. “Illinois’ next pension issue: Police, firefighter funds.” Associated Press. 6 Apr. 2014. (http://www.sj-r.com/article/20140406/NEWS/140409562/-1/json/?tag=1). 7 Apr. 2014.

Spielman, Fran. “Analysis: Rahm’s pension bill revisions solve—and create—problems.” Chicago Sun-Times. 8 Apr. 2014. (http://politics.suntimes.com/article/chicago/analysis-rahm%E2%80%99s-pension-bill-revisions-solve%E2%80%94and-create%E2%80%94problems/mon-04072014-728pm). 8 Apr. 2014.

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Peter Schiff: No Recovery, Just An Illusion Of Prosperity

I first started paying attention to Euro Pacific Capital’s Peter Schiff just prior to picking up his book Crash Proof: How to Profit From the Coming Economic Collapse (now Crash Proof 2.0, second edition) shortly after its early 2007 release. While some of the calls he made in that controversial text are still playing out, others have already come to fruition.

Subsequently, Schiff has been given credit for correctly-calling the U.S. housing bubble and its burst, and the 2008 global economic crisis.

Being one of Survival And Prosperity’s “crash prophets,” his latest investment recommendations are chronicled on this blog. As are his economic analyses and forecasts as well.

Here’s a recent breakdown of what Schiff sees going on with the U.S. economy and larger financial system, courtesy of a March 21 commentary entitled “Debt and Taxes” that’s posted on his Euro Pacific Capital website:

The last few years have proven that there is no line Washington will not cross in order to keep bubbles from popping. Just 10 years ago many of the analysts now crowing about the perfect conditions would have been appalled by policies that have been implemented to create them. The Fed has held interest rates at zero for five consecutive years, it has purchased trillions of dollars of Treasury and mortgage-backed securities, and the Federal government has stimulated the economy through four consecutive trillion-dollar annual deficits. While these moves may once have been looked on as something shocking…now anything goes.

But the new monetary morality has nothing to do with virtue, and everything to do with necessity. It is no accident that the concept of “inflation” has experienced a dramatic makeover during the past few years. Traditionally, mainstream discussion treated inflation as a pestilence best vanquished by a strong economy and prudent bankers. Now it is widely seen as a pre-condition to economic health. Economists are making this bizarre argument not because it makes any sense, but because they have no other choice.

America is trying to borrow its way out of recession. We are creating debt now in order to push up prices and create the illusion of prosperity. To do this you must convince people that inflation is a good thing…even while they instinctively prefer low prices to high. But rising asset prices do little to help the underlying economy. That is why we have been stuck in what some economists are calling a “jobless recovery.” The real reason it’s jobless is because it’s not a real recovery! So while the current booms in stocks and condominiums have been gifts to financial speculators and the corporate elite, average Americans can only watch from the sidewalks as the parade passes them by. That’s why sales of Mercedes and Maseratis are setting record highs while Fords and Chevrolets sit on showroom floors. Rising prices to do not create jobs, increase savings or expand production. Instead all we get is debt, which at some point in the future must be repaid

(Editor’s note: Bold added for emphasis)

“Which at some point in the future must be repaid”

Good luck trying to get your average American in 2014 to wrap their head around that crucial concept.

Once again, I agree with Schiff’s observation of what is going on all around us.

“Illusion of prosperity” is a fine choice of words here, and makes sense that I find a fine economic blog by the same name good reading.

As certain as the “Big One” will eventually hit California, so must our nation’s “financial reckoning day” arrive for all this debt we’ve accrued for some short-term “prosperity.”

You can read Schiff’s entire commentary on the Euro Pacific Capital website here.

By Christopher E. Hill
Survival And Prosperity (www.survivalandprosperity.com)

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Chicago Wakes To Proposed Property Tax Hike On April Fool’s Day

Many Chicagoans probably wish what’s being widely-reported in the local news this morning about a proposed property tax hike is just a silly April Fool’s joke.

It’s not.

Fran Spielman wrote on the Chicago Sun-Times website last night:

Chicago property owners will face $250 million in property tax increases over five years while city employees make increased pension contributions that will cost them at least $300 more a year, under landmark reforms unveiled Monday…

The new revenue the mayor had promised only after pension reform will come in the form of $50 million property tax increases for five straight years, beginning next year and continuing through 2019.

Top mayoral aides estimate that would cost the owner of a home valued at $250,000 with an annual property tax bill of $4,000 roughly $58 more or $290 over the five-year period. That’s on top of expected increases for the Chicago Board of Education and Chicago Park District…

(Editor’s note: Bold added for emphasis)

A couple of thoughts here:

First off, is anyone really surprised this is happening?

Regular readers of this blog shouldn’t be.

Higher fees, fines, and taxes. Less government services.

I’ve been squawking this for quite some time now.


“Black Dynamite- Who saw that coming?”
YouTube Video

Second, a $250,000 home? When discussing a Chicago Board of Education property tax hike last August, I blogged:

$230,000? You’d be hard-pressed to find a home for that little money in my former stomping grounds on the Northwest Side.

The same holds true for a $250,000 one (especially if it’s a property big enough for a family and doesn’t require a ton of work).

Which means many of my old neighbors will be coughing up significantly more than just $58 annually/$290 over five years as a result of this proposed hike.

And they already pay a big chunk of change to the City’s coffers.

Third, Spielman added last night:

The bottom line, according to Emanuel, is a plan that spreads the burden between employees, retirees and homeowners without raising property taxes so high that it triggers a mass exodus to the suburbs…

“Mass” being the key word here, because an exodus has already started. Former Chicago residents who have awakened to the “writing on the wall” are moving to the suburbs (yours truly included), leaving Cook County, and departing the state.

The push to make “temporary” personal and corporate income tax hikes permanent and the pursuit of class warfare in the form of a proposed millionaire tax hike by the ruling political party in the city, county, and state certainly don’t help the situation either.

Fourth, I can’t stand when tax hikes are proposed despite the lack of significant belt-tightening. Think the City of Chicago is as lean-and-mean as it possibly can be with its operations and set-up?

As long as 50 aldermanic wards exist, I’d argue no.

Fifth, as it stands right now, there’s still a state-required $600 million contribution due next year from the City to stabilize police and fire pension funds that this proposed property tax hike doesn’t address and has to be dealt with. Hal Dardick an Bill Ruthhart reported on the Chicago Tribune website this morning:

But the proposal the mayor and his top aides outlined late Monday would not address huge pension shortfalls for Chicago police, firefighters and teachers. Nor would it deal with the city’s most immediate, pressing financial problem: a state requirement to pay a whopping $600 million more toward police and fire pensions next year, a provision that could lead to a combination of tax increases, service cuts and borrowing

(Editor’s note: Bold added for emphasis)

You read right. Possibly more “tax increases, service cuts and borrowing” coming down the line shortly for Chicago residents.

Stay tuned…

By Christopher E. Hill
Survival And Prosperity (www.survivalandprosperity.com)

Sources:

Spielman, Fran. “Pension deal pinches city workers and taxpayers.” Chicago Sun-Times. 31 Mar. 2014. (http://politics.suntimes.com/article/chicago/exclusive-pension-deal-pinches-city-workers-and-taxpayers/mon-03312014-821pm). 1 Apr. 2014.

Dardick, Hal and Ruthhart, Bill. “Emanuel’s pension fix: Shrink benefits, raise taxes.” Chicago Tribune. 1 Apr. 2014. (http://www.chicagotribune.com/news/local/ct-rahm-emanuel-pension-property-tax-increase-met–20140401,0,1662095,full.story). 1 Apr. 2014.

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Milestone: Survival And Prosperity Reaches 2,000 Posts

Yesterday was a milestone for Survival And Prosperity:

2,000 posts have now been published on the blog

Not bad considering the weblog was started a little less than three-and-a-half years ago.

My previous flagship blog, Boom2Bust.com, “The Most Hated Blog On Wall Street,” only reached around 1,500 posts.

I think a little celebration is called for, don’t you?


“Clerks Dance”
YouTube Video

There’s lots more blogging to be done. Washington and the Fed has managed to “kick the can down the road” this far, and while the economic picture might look rosy to many for a bit longer, I’m still not deviating from that prediction I made back on Memorial Day Weekend 2007 about a U.S. financial crash.

In fact, I believe we’ve already started into the descent. And gradually, the U.S. economy and larger financial system that is weighed down by tremendous debt and steered by greed, arrogance, and incompetence will eventually crash hard.

That being said, America has been here before (Great Depression). And I do see the country getting back on firm economic ground again. But only after the excesses off a multi-decade debt binge are effectively purged.

No “doomsday,” but definitely a “financial reckoning day.”

In the meantime, it’s probably wise to take advantage of the present situation to prepare for what I see is in store for the country down the road. Whether that means finding a line of work that’s more stable or acquiring more income to preserve one’s standard of living in hard times, it’s something one may want to look into and take action on while it’s still possible to do so. Of course, individual circumstances vary. Still, improving one’s self-sufficiency- even incrementally- can make a big difference in an emergency or major crisis. It’s something our predecessors in this great nation of ours understood and practiced, but unfortunately has fallen by the wayside in modern times.

Survival and prosperity. That’s what this blog continues to be all about.

Christopher E. Hill
Editor

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Wisconsin Cuts Taxes While Illinois Looks To Make 2011 ‘Temporary’ Tax Hikes Permanent

Throughout the years, I’ve known/met a number of Illinois residents who can’t stand Wisconsin. Mostly from the Chicago area, they equate Wisconsin and its residents as being unsophisticated clowns.

I wonder if they haven’t noticed by now that the only circus around is in the “Land of Lincoln.”

While Illinois falls deeper into an economic abyss (public pension fix my butt), Wisconsin seems to have gotten their finances under control and look to be on the path to prosperity.

So much so they’re cutting taxes. Again.

Patrick Marley and Jason Stein reported on the Milwaukee Journal Sentinel website Monday afternoon:

Lowering taxes for the third time in less than a year, Gov. Scott Walker signed his $541 million tax cut bill in a ceremony Monday at a farm in Cecil as he travels through central and northern Wisconsin touting it.

Speaking at Horsens Homestead Farms, about 35 miles northwest of Green Bay, Walker called it a great day for Wisconsin taxpayers and a sign of the state’s shifting financial fortunes in recent years.

“Now, instead of billion dollar budget deficits, we have a surplus — and today that money is on its way to the workers, parents, seniors, property owners, veterans, job creators and others. You deserve to keep as much of your hard-earned money as possible — because after all, it is your money,” Walker said.

With growing tax collections now expected to give the state a $1 billion budget surplus in June 2015, Walker’s tax proposal will cut property and income taxes for families and businesses, and zero out all income taxes for manufacturers in the state.

Though the state’s tax revenue is increasing, GOP lawmakers and Walker are trimming state spending slightly for the next three years rather than increasing it

(Editor’s note: Italics added for emphasis)

Meanwhile, across the Cheddar Curtain in Illinois there’s this on the website of The State Journal-Register (Springfield). Doug Finke reported Friday:

Hundreds of employees would be laid off, state facilities would be closed and thousands of prison inmates released without supervision, state agency directors told senators Friday during a hearing to gauge the effect of possibly severe spending cuts next year.

During a more than three-hour joint hearing of the two Senate Appropriations committees, agency after agency warned of drastic consequences should they be forced to cut their current budgets by 20 percent.

“There would be extreme consequences for the economy across Illinois,” warned Ben Winick of Gov. Pat Quinn’s budget office. “Over a dozen state facilities would have to close. Thousands of state employees would have to be laid off.”

The hearing occurred just days before Quinn is scheduled to finally deliver his budget outline for the fiscal year that starts July 1…

Translated? Illinois residents, this is what will happen if you don’t support making the Democrat-led temporary 67 percent personal income tax hike and 46 percent corporate income tax hike implemented in January 2011 permanent next year.

I hear Governor Quinn will be delivering his budget plan tomorrow.

Instead of ridiculing Wisconsin, us FIBs (F***ing Illinois Bastards as we’re known by up there) might want to start emulating our neighbors to the north in certain respects before we completely destroy Illinois.

By Christopher E. Hill
Survival And Prosperity (www.survivalandprosperity.com)

Sources:

Marley, Patrick and Stein, Jacob. “Scott Walker signs tax cut legislation.” Milwaukee Journal Sentinel. 24 Mar. 2014. (http://www.jsonline.com/news/statepolitics/scott-walker-set-to-sign-tax-cut-legislation-b99231851z1-251936261.html). 24 Mar. 2014.

Finke, Doug. “State agencies outline cuts if forced to make 20% reductions.” The State Journal-Register. 21 Mar. 2014. (http://www.sj-r.com/article/20140321/NEWS/140329821). 24 Mar. 2014.

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State Of Illinois Deficit Grew By $49 Million Over Last Fiscal Year

The deficit for the State of Illinois is approaching $45 billion. And tucked inside a news release on Illinois Comptroller Judy Baar Topinka’s website yesterday was the following which showed the deficit widened over the last fiscal year. From “Topinka announces earliest state financial report release since 2006”:

The State of Illinois’ net position was reported as a deficit of $44.799 billion as of June 30, 2013. That represents a $49 million decrease in net position compared to the deficit of $44.750 billion at June 30, 2012. The State’s assets increased $3.762 billion from the prior year, offset by an increase in liabilities of $3.811 billion. The increases in liabilities resulted mainly from increases in the State’s net pension obligation of $1.720 billion and net other postemployment benefit obligations of $1.753 billion

You can read the entire news release on the State of Illinois Comptroller’s website here.

By Christopher E. Hill
Survival And Prosperity (www.survivalandprosperity.com)

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BIS: Global Debt Markets Grow To Estimated $100 Trillion In 2013, Up From $70 Trillion In 2007

Last night, I read about global debt markets hitting the $100 trillion-mark.

One word came to my mind at that moment:

Unsustainable.

Branimir Gruić and Andreas Schrimpf wrote “Cross-border investments in global debt markets since the crisis” in the latest BIS Quarterly Review- a report from the Bank of International Settlements (the central bank of central banks). From the publication released Sunday:

Global debt markets have grown to an estimated $100 trillion (in amounts outstanding) in mid-2013 (Graph C, left-hand panel), up from $70 trillion in mid-2007. Growth has been uneven across the main market segments. Active issuance by governments and non-financial corporations has lifted the share of domestically issued bonds, whereas more restrained activity by financial institutions has held back international issuance (Graph C, left-hand panel).

Not surprisingly, given the significant expansion in government spending in recent years, governments (including central, state and local governments) have been the largest debt issuers (Graph C, left-hand panel). They mostly issue debt in domestic markets, where amounts outstanding reached $43 trillion in June 2013, about 80% higher than in mid-2007 (as indicated by the yellow area in Graph C, left-hand panel)…

(Editor’s note: Italics added for emphasis)

“Not surprisingly, given the significant expansion in government spending in recent years, governments (including central, state and local governments) have been the largest debt issuers”

Gruić and Schrimpf are correct- I’m not surprised.

And regular Survival And Prosperity readers shouldn’t be either, as warnings about reduced government services and new/higher taxes and fees (to deal with all this new debt) have been issued time and time again.

You can read the entire BIS report here (page 22 of the .pdf file/page 18 of the publication contains Gruić and Schrimpf’s findings).

By Christopher E. Hill
Survival And Prosperity (www.survivalandprosperity.com)

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Moody’s Downgrades Chicago’s Credit Rating Again, Issues Negative Outlook

Just as I was about to blog about prepping tonight I observed the following splashed on the homepage of the Chicago Tribune website:

Chicago credit rating takes major hit

Chicago’s financial standing took a hit Tuesday when a major bond rating agency once again downgraded the city’s credit worthiness…

No surprise there, all things considered. No real effort has been made to tackle Chicago’s financial woes, which led to bond credit rating giant Moody’s Investor Service downgrading the City of Chicago’s general obligation (GO) and sales tax ratings to A3 from Aa3, water and sewer senior lien revenue ratings to A1 from Aa2, and water and sewer second lien revenue ratings to A2 from Aa3 back on July 17, 2013.

After seeing that headline, I decided to head over to Moody’s Investors Service website to check out the latest “Ratings News,” where the following was posted:

Rating Action: Moody’s downgrades Chicago, IL to Baa1 from A3, affecting $8.3 billion of GO and sales tax debt…

Also downgrades water and sewer senior lien revenue bonds to A2 from A1 and second lien revenue bonds to A3 from A2, affecting $3.3 billion of debt; outlook negative for all ratings…

According to Moody’s, “Obligations rated Baa are judged to be medium-grade and subject to moderate credit risk and as such may possess certain speculative characteristics.”

Their Global Credit Research unit added:

The Baa1 rating on Chicago’s GO debt reflects the city’s massive and growing unfunded pension liabilities, which threaten the city’s fiscal solvency absent major revenue and other budgetary adjustments adopted in the near term and sustained for years to come. The size of Chicago’s unfunded pension liabilities makes it an extreme outlier, as indicated by the city’s fiscal 2012 adjusted net pension liability (ANPL) of 8.0 times operating revenue, which is the highest of any rated US local government. While the Illinois General Assembly’s recent passage of pension reforms for the State of Illinois (A3 negative) and the Chicago Park District (CPD) (A1 negative) suggests that reforms may soon be forthcoming for Chicago, we expect that any cost savings of such reforms will not alleviate the need for substantial new revenue and fiscal adjustments in order to meet the city’s long-deferred pension funding needs. We expect that the city’s pension contributions will continue to fall below those based on actuarial standards. The city’s slowly-amortizing debt levels are also large and growing. The Baa1 rating also incorporates credit strengths including Chicago’s large tax base that sits at the center of one of the nation’s most diverse regional economies and the city’s broad legal authority to raise revenue…

You can read the entire Moody’s piece about the downgrade on their website here.

By Christopher E. Hill
Survival And Prosperity (www.survivalandprosperity.com)

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The Civic Federation Proposes Plan For Achieving Long-Term Fiscal Sustainability In Illinois

The last time I blogged about The Civic Federation, an independent, non-partisan government research organization that provides analysis and recommendations on government finance issues for the Chicago region and State of Illinois, was right before the holidays.

The Civic Federation is in the headlines again these days for proposing a five-year plan to balance the Illinois state budget, eliminate its huge bill backlog, and reduce income tax rates. From a March 3 press release:

In a report released today, the Civic Federation’s Institute for Illinois’ Fiscal Sustainability proposes a comprehensive plan for achieving long-term fiscal sustainability for the State of Illinois. The five-year plan would fully pay down the State’s $5.4 billion backlog of unpaid bills while gradually reducing income tax rates by 20%, broadening the tax base and building a reserve fund as protection against future economic downturns…

$5.4 billion? That’s a lot of bills.

One part of this financial rescue plan will likely raise the eyebrows of certain Illinois residents. From the press release:

3. Broaden Income Tax Base to Include Federally Taxable Amounts of Retirement Income: Out of the 41 states that impose an income tax, Illinois is one of only three that exempt all pension income and one of 27 that exclude all federally taxable Social Security income. The State should broaden its income tax base to create greater equity among taxpayers and facilitate the gradual rollback of the income tax rates. The broader base will also ensure greater long-term sustainability of the State’s resources by accessing a growing portion of the Illinois economy…

You can read the entire press release here, as well as find a link to The Civic Federation’s 50-page report State of Illinois FY2015 Budget Roadmap: State of Illinois Budget Overview, Projections and Recommendations for the Governor and the Illinois General Assembly.

By Christopher E. Hill
Survival And Prosperity (www.survivalandprosperity.com)

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Chicago, The Writing Is On The Wall

The city of Chicago is in for some tough times down the road.

“The Machine” keeps putting a positive spin on the city’s deteriorating financial condition, but the numbers don’t lie. I’ve rattled them off time and time again, the most recent being Tuesday. The Chicago press (sans Fran Spielman over at the Chicago Sun-Times and a few others) has even caught on, publishing articles with more frequency these days that reveal just how ugly the city’s finances truly are. Case in point, a Chicago Tribune editorial entitled “Chicago is on the road to Detroit” that appeared on their website yesterday. From the piece:

By the most recent numbers, Mayor Rahm Emanuel’s government owes $13.9 billion in general obligation bond debt, plus $19.5 billion in unfunded pension obligations. Add in Chicago Public Schools and City Hall’s other “sister agencies” and you’re talking billions more in debts that Chicago taxpayers owe. Yet here we are on a Wednesday when the mayor probably will get approval from a derelict City Council to issue another up-to-$900 million in bonds backed by property taxes — and to double, to $1 billion, the amount of short-term bank money his administration can borrow to raise cash…

(Editor’s note: Italics added for emphasis)

By the way, Mayor Emanuel got that approval. Fran Spielman reported on the Chicago Sun-Times website Wednesday morning:

Without a word of debate, the City Council on Wednesday blindly added $1.9 billion to Chicago’s mountain of debt even though aldermen have no idea how the money will be spent.

The vote was 43-to-4. “No” votes were cast by Aldermen Bob Fioretti (2nd), Scott Waguespack (32nd), Brendan Reilly (42nd) and John Arena (45th)…

Now, I’ve heard/read some Chicagoans say something along the lines of don’t worry about the city’s finances, Governor Quinn and the State of Illinois or President Barack Obama and the federal government will ride to the rescue of their fellow Democrats in control of the “Windy City.”

To which I say, I’m not so sure. Is there anyone in America who doesn’t know how much of an economic basket case the “Land of Lincoln” is? A $100.5 billion public pension debt and the worst credit rating of all 50 U.S. states routinely make headlines across the country. As for the federal government, I keep encountering the words “insolvent” and “bankrupt” more and more these days to describe the nation’s finances. And don’t think for a second other economically-challenged cities across the country won’t cry foul to the Oval Office and their elected representatives if Chicago is bailed out. I find it hard to believe the State of Illinois or the Feds could come to Chicago’s rescue without there being serious financial and political repercussions.

Chicago, the writing is on the wall. By the looks of things, that great city where I was born and from which I recently just left is now past the proverbial point of no return, no longer looking capable of effectively navigating the growing financial crisis.

While I don’t foresee the city’s death, I do envision a continuation of its already gradual decline until a point of fiscal implosion is reached. Will it be Detroit-esque in its bottoming out? I don’t know. But it sure as hell won’t be pretty.

Faced with such a scenario, will Chicagoans choose to stay and contend with the almost certain prospect of much higher taxes and fees in conjunction with curtailed city services (public safety comes to mind here), or will they depart the “Second City” like I did?

One might think the latter (going), but I’m sure there will be plenty of the former (staying).

In the interests of surviving and prospering, which is the better choice?

I don’t think the answer is as clear-cut as many readers might think. And it’s something I’ll be exploring and blogging about more in the coming days.

By Christopher E. Hill
Survival And Prosperity (survivalandprosperity.com)

Sources:

“Chicago is on the road to Detroit.” Chicago Tribune. 5 Feb. 2014. (http://www.chicagotribune.com/news/opinion/editorials/ct-chicago-debt-edit-0205-20140205,0,3757189.story). 6 Feb. 2014.

Spielman, Fran. “City Council OKs going $1.9 billion deeper into debt.” Chicago Sun-Times. 5 Feb. 2014. (http://www.suntimes.com/25398572-761/city-council-oks-going-19-billion-deeper-into-debt.html). 6 Feb. 2014.

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Chicago Borrows $1.9 Billion, Piling On More Debt ‘For The Children’

“Mayor Rahm Emanuel closed the books on 2011 with $310 million in cash on hand, $167 million more than the year before, but added $465 million to the mountain of debt piled on Chicago taxpayers, year-end audits show…

The new round of borrowing brings Chicago’s total long-term debt to just over $27 billion. That’s $10,000 for every one of the city’s nearly 2.7 million residents. More than a decade ago, the debt load was $9.6 billion or $3,338-per-resident.”

-Chicago Sun-Times website, July 22, 2012

“Mayor Rahm Emanuel closed the books on 2012 with $33.4 million in unallocated cash on hand — down from $167 million the year before — while adding to the mountain of debt piled on Chicago taxpayers, year-end audits show…

The new round of borrowing brings Chicago’s total long-term debt to nearly $29 billion. That’s $10,780 for every one of the city’s nearly 2.69 million residents.”

-Chicago Sun-Times website, July 26, 2013

Chicago keeps piling on massive amounts of debt. From Fran Spielman yesterday on the Chicago Sun-Times website:

Chicago will test the bond market for the first time since its bond rating dropped three notches, thanks to $1.9 billion in borrowings added Monday to the mountain of debt piled on Chicago taxpayers.

The City Council’s Finance Committee authorized two massive borrowings: a $900 million general obligation bond issue to refinance old debt, pay for equipment and capital projects and bankroll $100 million for legal settlements incurred last year and a $1 billion borrowing for Midway Airport.

The Finance Committee also agreed to double — from $500 million to $1 billion — a so-called “commercial paper” program used to cover short-term borrowing between bond deals.

The general obligation bond issue includes $200 million in debt refinancing and $130 million in debt restructuring to “better align revenues with our obligations,” as [Chief Financial Officer Lois] Scott put it.

The so-called “scoop-and-toss” technique will stave off even higher taxes and fees, but it will saddle Chicagoans with another decade of debt that should be paid off today

(Editor’s note: Italics added for emphasis)

Mayor Rahm Emanuel’s worn-out line “it’s for the children” comes to mind here.

As well as that saying “you can pay now or pay later.”

Which is what Chicagoans will eventually be forced to do when the city’s “financial reckoning day” arrives.

The Chicago Tribune did a pretty good job illustrating just how serious the city’s debt crisis is becoming. Hal Dardick, Heather Gillers, and Jason Grotto reported on the Tribune website yesterday:

In a move that will add to the city’s mountain of debt, Mayor Rahm Emanuel won support Monday from the City Council’s Finance Committee to issue up to $900 million in bonds backed by property taxes.

It’s the largest request put forth during Emanuel’s tenure and comes at a time when Chicago already has about $7 billion in outstanding general obligation debt, more per capita than bankrupt Detroit or any of the 10 biggest U.S. cities except New York

Monday, aldermen asked few questions about the borrowing as the ordinance authorizing the debt sailed through the committee with virtually no debate.

“It raises questions of how much City Council members understand the financial condition of the city and what the plan going forward will be to meet the debt,” said Laurence Msall, president of the nonpartisan Civic Federation budget watchdog group…

The amount of borrowing sought by Emanuel suggests his administration continues to need huge loans to run the city

(Editor’s note: Italics added for emphasis)

I can’t begin to tell you how depressing it is watching “The Machine” steadily bring the “City of Broad Shoulders” down to its knees. But what does City Hall care? More than likely they’ll have moved on to comfortable retirements or “bigger and better things” by the time the city implodes as a result of “scooping and tossing.”

Ubi Est Mea? (Pulitzer prize-winning newspaper columnist Mike Royko’s suggested Chicago city motto of “Where’s Mine?”)

How about “Not On My Watch,” all things considered?

By Christopher E. Hill
Survival And Prosperity (survivalandprosperity.com)

Sources:

Spielman, Fran. “City to borrow $1.9 billion in first test since rating downgrade.” Chicago Sun-Times. 3 Feb. 2014. (http://www.suntimes.com/news/metro/25360629-418/city-to-borrow-19-billion-in-first-test-since-rating-downgrade.html). 4 Feb. 2014.

Dardick, Hal, Gillers, Heather, and Grotto, Jason. “Mayor seeks to borrow up to $900 million more.” Chicago Tribune. 3 Feb. 2014. (http://articles.chicagotribune.com/2014-02-03/news/ct-met-bonds-new-chicago-borrowing-20140204_1_tax-increases-city-leaders-finance-committee). 4 Feb. 2014.

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Growing Illinois Fiscal Fiasco Makes Wisconsin Relocation More Attractive

Regular readers of Survival And Prosperity may recall me blogging from time to time that as things stand, Wisconsin- not Illinois- looks to be my primary state of residence down the road. For example, I wrote back on January 29 of last year:

By the time I started this blog back in November 2010, I already had a pretty good idea I’d eventually be leaving the city of Chicago to reside someplace else. And every once in a while, I’d query the “best places” to live in America- should TSHTF or not. While the area of southeastern Wisconsin I’m looking at moving to in a few years is probably not “ideal” (even less so the suburbs of Chicago) from a prepper’s perspective, practitioners of modern survivalism would probably see more positives than negatives with the location. Keeping in mind that not only do I envision a certain lifestyle for myself down the road, but I also think I have a pretty good idea of what will be required to “survive and prosper” in America in the coming years, this part of the Midwest really appears to be a nice fit not only for me but my girlfriend as well. Here’s hoping it is…

Sure, certain Wisconsin taxes tend to be higher than in the “Land of Lincoln.” But at least it’s not a fiscal basket case, where I can envision Illinois one day leapfrogging our neighbors to the north when it comes to levels of revenue collection.

Chicago Tribune columnist Dennis Byrne reminded the paper’s readers just how precarious our financial situation has gotten here in Illinois… in addition to suggesting a state we might want to consider emulating. He wrote on the Tribune website on January 28:

Illinois is a stinking mess.

A steaming heap of suffocating debt, endless greed, blind self-interest and numbing incompetence. How we’ve been able to survive this long without plunging into the abyss is beyond me, and all reason.

No need here to document all of the state’s failures. Way behind on its bills. The nation’s worst credit rating. Higher unemployment than the nation. Business wanting to scram, fed up with an unfriendly entrepreneurial climate. Crushing pension obligations so far into the future that no one alive today, even if they ponied up every cent they made (after taxes, of course), will ever see the end of it.

Illinois is run by a self-renewing, power-hungry, piggish oligarchy so impervious to change (I hesitate to use the word reform, because true reform is as rare in Illinois as is the sight of Pike’s Peak) that it makes feudalism look good.

Don’t try to argue that a recent package of minor changes to the public employees’ pension system, grudgingly enacted by the serfs in the state legislature, is reform. Even if it were, it’s going nowhere because it will be dead on arrival in Illinois’ courts. That’s because the hoggish public employee unions were able, at the last minute, to ram into the state constitution a provision that guarantees their cupidity will be fed, well, forever.

What makes it all so vexing is how close the answer to our problems is: Wisconsin.

While Illinois is circling the drain, Wisconsin has saved itself from a similar fate and, in the aftermath of the longest-lasting recession since Amelia Earhart became the first woman to fly solo across the Atlantic Ocean, is actually doing OK, if not prospering…

“Prospering.”

It’s been a long time since I’ve heard/seen that word associated with Illinois.

Which is too bad, because I really do love this state and my fellow Illinoisans.

But seeing as my goal remains not only to survive but prosper as the times become more tumultuous, Byrne’s observation further convinces me my future still lies up north.

By Christopher E. Hill
Survival And Prosperity (www.survivalandprosperity.com)

Source:

Byrne, Dennis. “Illinois Should Look To Wisconsin.” Chicago Tribune. 28 Jan. 2014. (http://www.chicagotribune.com/site/ct-oped-byrne-0128-20140128,0,5528813.column). 3 Feb. 2014.

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Chicago’s Finances A Mess For 2014 And Beyond

The beginning of the new year is always a popular time for predictions.

Here’s one I’ve heard being uttered with more regularity lately:

“Chicago’s the next Detroit”

You may recall that back on December 3, the City of Detroit officially became the largest municipality in U.S. history to enter Chapter 9 bankruptcy.

I’m guessing those making that comment presume the “Windy City” is going to be bankrupt too.

I just got done reading another comparison to Detroit being made again. This time it’s from TheStreet.com, the U.S. financial news and services website co-founded by Jim Cramer, host of CNBC’s Mad Money. Jonathan Yates wrote on December 30:

A recent report by the Economist Intelligence Unit rated Chicago one of the top 10 cities in the world for its ability to “attract capital, business, talent and tourists.”

Although that certainly will focus global attention on “The Second City,” Chicago’s precarious financial condition could result in it becoming even more well known — for going broke…

At least Detroit had an excuse with the collapse of the automobile industry.

The major reason for Chicago’s financial woes is mismanagement. The city’s employee costs, especially for pensions, are unsustainable…

Yates, a contributor to TheStreet.com, suggests investors avoid Chicago bonds. He pointed out later in his piece:

Chicago is a great city with great restaurants, great museums and great architecture.

But those are not reasons to buy its bonds, because Chicago’s finances are a mess, and that won’t change anytime soon…

“Chicago’s finances are a mess, and that won’t change anytime soon…”

Sadly, I agree with him there.

Now, Yates mentioned Chicago’s public pension crisis. Back on August 5, The New York Times highlighted just how serious a threat it is to the city’s well-being. Monica Davey and Mary Williams Walsh reported on the Times website:

Corporations are moving in, and housing prices are looking better across the region. There has been a slight uptick in population. But a crushing problem lurks beneath the signs of economic recovery in Chicago: one of the most poorly funded pension systems among the nation’s major cities. Its plight threatens to upend the finances of President Obama’s hometown, now run by his former chief of staff, Rahm Emanuel.

The pension fund for retired Chicago teachers stands at risk of collapse. The city’s four funds for other retired city workers are short by $19.5 billion. At least one of the funds is in peril of running out of money in less than a decade. And starting in 2015, the city will be required by the state to make far larger contributions to the funds, which could leave it hundreds of millions of dollars in the red — as much as it would cost to pay 4,300 police officers to patrol the streets for a year

(Editor’s note: Italics added for emphasis)

Rick Lyman of the Times added on December 4:

Under state law, the city must increase its contributions to its workers’ pension funds by $590 million in 2015, to a total annual contribution of $1.4 billion for current and future retirees. If no pension deal can be reached by November of next year, when the city will draft its next budget, the city will either have to raise taxes or cut services or some combination of both

(Editor’s note: Italics added for emphasis)

City Hall and their supporters can spin Chicago’s growing financial crisis as much as they want. But at the end of the day, they’ve got all the above problems to contend with as well as a long-term debt that’s now up to nearly $29 billion, or $10,780 for every city resident, according to the latest City of Chicago official audit.

I became aware of the extent of Chicago’s financial woes a couple of years back.

It’s a big reason why my girlfriend and I moved out of the city when we did.

I’ve been warning about this debacle for some time now on this blog. I can only hope my Chicago-based readers have taken note of it and are at least thinking about how they might minimize their exposure to the coming mess.

By Christopher E. Hill
Survival And Prosperity (www.survivalandprosperity.com)

Sources:

Yates, Jonathan. “Avoid Chicago’s Bonds; It Could Be the Next Detroit.” TheStreet.com. 30 Dec. 2013. (http://www.thestreet.com/story/12188473/1/avoid-chicagos-bonds-it-could-be-the-next-detroit.html). 3 Jan. 2014.

Davey, Monica and Walsh, Mary Williams. “Chicago Sees Pension Crisis Drawing Near.” The New York Times. 5 Aug. 2013. (http://www.nytimes.com/2013/08/06/us/chicago-sees-pension-crisis-drawing-near.html?pagewanted=1&_r=0&src=me). 3 Jan. 2014.

Lyman, Rick. “Chicago Pursues Deal to Change Pension Funding.” The New York Times. 4 Dec. 2013. (http://www.nytimes.com/2013/12/05/us/chicago-pursues-deal-to-change-pension-funding.html?_r=0). 3 Jan 2014.

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Chicago Tallies 415 Murders In 2013

Good news for the city of Chicago- murders stayed under the 500-mark in 2013. Jeremy Gorner reported on the Chicago Tribune website last night:

Homicides dropped 18 percent in Chicago last year and crime overall was down 16 percent, according to statistics released by the police department this morning.

The decline in homicides was a more modest 5 percent when compared with 2011. The department reported 435 homicides in 2011, 503 in 2012 and 415 in 2013…

Chicago has surpassed 500 murders twice in the last five years. In 2008, under Mayor Richard M. Daley, the number of homicides reached 513, declining to 460 in 2009, 437 in 2010, and 435 in 2011 before jumping to 503 in the first full year of Mayor Rahm Emanuel’s administration.

Gorner also added in his piece:

Shootings across the city dropped by 24 percent from 2012 and 16 percent from 2011, according to the department’s numbers. Sexual assaults were down 6 percent from last year, robberies down 12 percent, serious battery down 16 percent, burglaries down 22 percent, motor vehicle thefts down 23 percent, thefts down 3 percent.

The reductions came at a price: Nearly $100 million in overtime pay, triple what was budgeted for 2013…

“Nearly $100 million in overtime pay”

Unsustainable, especially when you consider the City of Chicago’s growing financial woes.

As for the City’s rosy crime statistics- there’s talk the reported numbers don’t reflect the reality of Chicago’s criminal activity.

Personally, the news on the crime front is encouraging. But I’m going to take it with a grain of salt.

By Christopher E. Hill
Survival And Prosperity (www.survivalandprosperity.com)

Source:

Gorner, Jeremy. “Chicago police: Crime down 16 percent, homicides down 18 percent.” Chicago Tribune. 1 Jan. 2014. (http://www.chicagotribune.com/news/local/breaking/chi-chicago-police-crime-down-16-percent-homicides-down-18-percent-20140101,0,3868242.story). 2 Jan. 2014.

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