Taxes

Standard & Poor’s Warns Chicago ‘Downgrade Of More Than One Notch Is Possible’

Not too much talk about the following last week in the Chicago-area news. From Standard & Poor’s credit analyst Helen Samuelson over on S&P’s Global Credit Portal website on April 9:

CHICAGO (Standard & Poor’s) April 9, 2015–After months of campaigning and uncertainty, Chicago (A+/Negative general obligation debt rating) can get back to the business of running itself. As such, we expect Mayor Rahm Emanuel’s attention to be focused on the city’s budget challenges, namely its ballooning pension obligation.

During the course of the election — and particularly during the runoff — Mayor Emanuel avoided addressing the possibility of property tax increases to help pay for these pension obligations.

“Following Tuesday’s vote, in order to maintain its current rating, we expect the administration to address the pension and budget challenges head on by providing solutions that will support the city’s credit strengths in the near and far term,” said Standard & Poor’s credit analyst Helen Samuelson.

Our ‘A+’ rating is predicated on Chicago’s ability to make the changes necessary to address its budget gap and pension problem. However, even with this ability, to ensure long-term stability Chicago still needs to demonstrate its willingness to make difficult choices that address its budget issues.

Otherwise, the ‘A+’ rating could be severely pressured. Our negative rating outlook reflects the city’s fiscal pressures. If the city doesn’t find structural solutions, a downgrade of more than one notch is possible.

In our view, if the city fails to articulate and implement a plan by the end of 2015 to sustainably fund its pension contributions, or if it substantially draws down its reserves to fund the contributions, we will likely lower the rating. This is regardless of whatever relief the state legislature may or may not provide. We will likely affirm the rating and revise the outlook to stable if Chicago is able to successfully absorb its higher pension costs while maintaining balanced budgetary performance and reserves at or near their current level…

(Editor’s note: Bold added for emphasis)

To date, a different credit rating agency- Moody’s- has been making the most noise about the City of Chicago’s financial woes. Yvette Shields reported on The Bond Buyer website on April 6:

The city has suffered a steep credit rating slide and further credit deterioration is threatened.

Chicago’s GO ratings range from a low of Baa2 — two notches above speculative grade — from Moody’s to a high of A-plus from Standard & Poor’s…

“A-plus.” That may not be the case at year end.

You can read that entire Standard & Poor’s piece on the Global Credit Portal here.

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

Source:

Shields, Yvette. “Big Stakes as Market Awaits Chicago’s Mayoral Pick.” The Bond Buyer. 6 Apr. 2015. (http://www.bondbuyer.com/news/regionalnews/big-stakes-as-market-awaits-chicagos-mayoral-pick-1071986-1.html). 16 Apr. 2015.

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Thursday, April 16th, 2015 Credit, Debt Crisis, Entitlements, Government, Taxes No Comments

Chicago To Be Run By Emergency Financial Control Board Within 2 Years?

Last Wednesday, I reminded Survival And Prosperity readers (local ones in particular) that Chicago- upon reelecting Rahm Emanuel as Mayor- remains in serious financial trouble. From that post:

As Rahm Emanuel enters his second term as Mayor of Chicago, I feel that proverbial brick wall is still fast-approaching.

Perhaps the best Chicagoans can hope for at this point is a controlled crash landing.

I know one thing. If I were still living in the city, I’d be preparing for the coming carnage…

Some readers might feel I was being a little too “sensational” with that statement. Therefore, I’d like to offer up the following for your consideration. Reuters’ Megan Davies and Karen Pierog reported on April 8:

Chicago has not seen the population losses Detroit did and its business and commercial real estate markets remain healthy, but its current circumstances are more dire than any other major American city today, with aggregate debt of $21.4 billion, up 60 percent since 2004.

Although Chicago’s situation isn’t bad enough yet to warrant a bankruptcy filing, that threat is out there if it fails to tackle its problems.

“People say Chicago’s not Detroit,” said Tom Metzold, a senior portfolio advisor at investment manager Eaton Vance. “Not right now. Chicago is Detroit ten years from now. I don’t care how economically strong your economy is. They don’t have a printing press. You can only tax so much.”

Metzold estimated the odds of a Chapter 9 bankruptcy in the next five years are “virtually zero” but said in the next 10 years that could rise to 25 percent if it fails to act

(Editor’s note: Bold added for emphasis)

In case readers are wondering, Metzold’s s “Street cred” includes serving as VP and Co-Director of Municipal Investments at Eaton Vance (one of the oldest investment management firms in the U.S.- established 1924), and as its Portfolio Manager since 1991.

Not as “optimistic” about Chicago’s financial future is Joe Mysak, Editor of Bloomberg Brief. He warned in an April 8 commentary:

I’m not a betting man. If I were, I’d bet that Chicago is going to be run by an Emergency Financial Control Board, or something like it, within two years, the same as New York City back in 1975 (and until 1986)…

(Editor’s note: Bold added for emphasis)

Mysak, who’s been covering the municipal bond market since 1981, pointed out the city’s abysmal Moody’s credit rating (“one step from the basement of investment grade”) and wrote:

So a cut to junk may well be in the cards, and with it diminished and eventually lack of access to capital. Chicago has already creatively used, and some would say abused, the municipal market to subsidize city operations…

When the banks no longer want to lend to Chicago is presumably when the state of Illinois would come in, offering cash, loan guarantees, intercession with the federal government and whatever else the city needs in exchange for external management via an Emergency Financial Control Board…

(Editor’s note: Bold added for emphasis)

The author of the Encyclopedia of Municipal Bonds signed-off with:

Two years. That’s how long I give the city of Chicago. Good luck, Rahm.

Good luck Chicago…

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

Sources:

Davies, Megan and Pierog, Karen. “Chicago Mayor Rahm Emanuel confronts fiscal nightmare as he begins second term.” Reuters. 8 Apr. 2015. (http://www.rawstory.com/rs/2015/04/chicago-mayor-rahm-emanuel-confronts-fiscal-nightmare-as-he-begins-second-term/). 12 Apr. 2015.

Mysak, Joe. “Next Stop for Chicago: Emergency Financial Control Board.” Bloomberg Brief. 8 Apr. 2015. (http://newsletters.briefs.bloomberg.com/document/3fz176niqylzjr6oax/commentary). 12 Apr. 2015.

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Thinking Of Illinois’ Financial Woes While In Wisconsin

Saturday morning while working on projects around my family’s place in Wisconsin, something I read earlier in the week came to mind. Steven Malanga wrote on The Fiscal Times website on March 30:

Illinois officials… are awaiting a ruling from the state’s Supreme Court on a suit by workers seeking to overturn the legislature’s 2013 pension reforms. If the court, which has previously refused to allow any changes to retirement plans for retirees or current workers, throws out the reforms, Illinois will face $145 billion in higher taxes over the next three decades just to pay off the debt, according to a report by the Civic Committee of Chicago.

(Editor’s note: Bold added for emphasis)

“Illinois will face $145 billion in higher taxes…”

I don’t recall hearing/seeing that figure being used before, so I decided to track it back to the source. From an October 9, 2014, press release from the Civic Committee:

The “What If?” initiative identifies some of the consequences that could result from an overturn of the pension law, including:

$145 billion in higher taxes and service cuts over 30 years
• Highest property taxes in the nation
• 41¢ of Big Three state tax dollars devoted to pensions, up from 8¢ in 2007
• A possible $2,500 tuition spike at the University of Illinois
• Severe cuts to K-12 education, leading to as many as 13,000 teacher layoffs
• Critical meltdown of social services, including the end of child care for 41,000 kids and 21,000 seniors losing in-home care

(Editor’s note: Bold added for emphasis)

That’s a pretty scary picture being painted. The accompanying “What If?” brochure does a good job at accomplishing that. Consider some of these additional forecasts being made:

• 64,000 jobs lost
• $375 average property tax increase
• $3,000-plus in state taxes per household

The brochure didn’t indicate how all this was computed.

However, if conditions in the “Land of Lincoln” deteriorate to such a point, Wisconsin is where I’ll likely stay for good. Regular readers might recall that I’ve mentioned my permanent address being a Wisconsin one in the future.

You can read that entire press release/learn more about their “What If?” initiative on the Civic Committee website here.

While I support public pension reform in Illinois, I’m just not convinced what’s been put into play (passed into law) is the best way of going about it.

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

Source:

Malanga, Steven. “Outrageous public pensions could bankrupt these states.” The Fiscal Times. 30 Mar. 2015. (http://finance.yahoo.com/news/outrageous-public-pensions-could-bankrupt-172700274.html). 5 Apr. 2015.

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Bill Introduced To Permit Illinois Municipalities To File For Bankruptcy

Since I started blogging about a U.S. financial crash back on Memorial Day Weekend 2007, I’ve believed one casualty will be municipal government. Particularly in Illinois. So imagine my non-surprise when I spotted an article on the Chicago Tribune website a couple of days ago about proposed legislation at the state level granting Illinois towns the authority to file for bankruptcy. Nick Swedberg of the Associated Press wrote on March 26:

Stressed by pension debt, other financial issues and the possibility losing a chunk of their state aid, some Illinois cities want the option to file for bankruptcy. They’ve found an ally in a Republican lawmaker, who’s proposed legislation to allow municipalities to follow in the footsteps of Detroit and other cities in restructuring debt and paying back creditors…

Rep. Ron Sandack is sponsoring legislation that would grant authority for communities to file for bankruptcy under Chapter 9 of the federal code. The Downers Grove Republican says it’s a “measure of last resort,” especially with Gov. Bruce Rauner’s proposal in next year’s budget to cut in half the local governments’ share of state income taxes by 50 percent.

“It’s just giving time and space to do things right,” he said…

Swedberg added later in the piece:

Municipal bankruptcies are rare, NCSL data shows. Of 37 local government filings since 2010, only 8 were cities, with the majority filed by utilities and special districts.

Detroit filed for the nation’s largest municipal bankruptcy in July 2013, looking to restructure $12 billion of debt…

It’s true. Municipal bankruptcies haven’t happened too often. But keep in mind what Eric Weiner wrote on the NPR website back on February 28, 2008:

For most of U.S. history, cities and towns were not eligible for bankruptcy protection. But during the Great Depression, more than 2,000 municipalities defaulted on their debt, and they pleaded with President Roosevelt for a federal bailout. “All they got was sympathy,” reported Time magazine in 1933. Instead, Roosevelt pushed through changes to the bankruptcy laws that allows towns and cities to file for bankruptcy. They even got their own section of the bankruptcy code: Chapter Nine…

(Editor’s note: Bold added for emphasis)

There’s also this from Robert Slavin on The Bond Buyer website back on January 14:

For the municipal bond industry, 2015 marks the midpoint in what may turn out to be the decade of the bankruptcy.

Four of the five largest municipal bankruptcy filings in United States history have been made in roughly the last three years, a trend analysts attribute to the aftereffects of the 2008 credit crisis and Great Recession, as well as changing attitudes about debt.

“The crash of 2008 and five years of stagnation preceded by years of escalating wages, pensions and Other Post-Employment Benefits set the stage for our recent Chapter 9 filings,” said Arent Fox partner David Dubrow.

Chapter 9 municipal bankruptcy was adopted in 1937 but had been rarely used, particularly by large governments. However, since November 2011 San Bernardino, Calif., Stockton, Calif., Jefferson County, Ala., and Detroit have filed four of the five largest bankruptcies as measured by total obligations.

(Editor’s note: Bold added for emphasis)

Could the specter of Meredith Whitney, the “Diva Of Doom,” be returning to take revenge on the municipal bond industry?

I’m not surprised Illinois municipalities would be interested in House Bill 298. From Patrick Rehkamp and Andrew Schroedter on the website of the Chicago-based Better Government Association back on December 6, 2014:

Reasons for filing vary but often include troubled public development projects, unanticipated hefty legal judgments against a taxpayer-backed entity, or massive pension and bond debt payments that leave a municipality cash-strapped and unable to cover operating costs of employee salaries, vendor payments and other expenses.

(Editor’s note: Bold added for emphasis)

The public pension crisis in Chicago and Illinois has been well-publicized for some time now. And while such entitlements are supposedly protected by a provision in the 1970 Illinois Constitution, the BGA noted in their piece:

In Illinois, public employee pensions are guaranteed by the state constitution. But in the Detroit and Stockton, California bankruptcy cases, federal judges have ruled that pension benefits can be adjusted, the same as other debts, despite a constitutional guarantee.

(Editor’s note: Bold added for emphasis)

You can track the progress of HB 298 on the Illinois General Assembly website here.

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

Sources:

Swedberg, Nick. “Bill pushes for possible municipal bankruptcies in Illinois.” Associated Press. 29 Mar. 2015. (http://www.chicagotribune.com/news/sns-bc-il–closer-look-bankruptcy-20150329-story.html). 3 Apr. 2015.

Weiner, Eric. “What Happens When City Hall Goes Bankrupt?” NPR. 28 Feb. 2008. (http://www.npr.org/templates/story/story.php?storyId=60740288). 3 Apr. 2015.

Slavin, Robert. “Why So Many Big Bankruptcies?” The Bond Buyer. 14 Jan. 2015. (http://www.bondbuyer.com/news/markets-buy-side/why-so-many-big-bankruptcies-1069539-1.html). 3 Apr. 2015.

Rehkamp, Patrick and Schroedter, Andrew. “Next Up: Illinois Municipal Bankruptcy?” Better Government Association. 16 Dec. 2014. (http://www.bettergov.org/next_up_illinois_municipal_bankruptcy/). 4 Apr. 2015.

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Chicago City Council Budget Chair On Property Tax Hike: ‘I Believe We Can Truly Say That It Will Happen’

Back when I was an aide to U.S. Senator Paul Simon of Illinois, there was one cardinal rule to be followed when communicating with constituents:

Good news comes from Paul, bad news comes from his assistants.

With that in mind, last night my girlfriend and I were watching the Chicago news on TV when the following story appeared. From the WGN Web Desk this morning:

A Chicago property tax hike could be on the way.

That wasn’t announced by Mayor Rahm Emanuel.

It was said by an alderman who is trying to help him get reelected.

Several of Emanuel’s allies held a press conference Monday to question how challenger Jesus “Chuy” Garcia would pay for the promises he’s making on the campaign trail.

That’s when 34th Ward Alderman Carrie Austin, the City Council budget chairman, said property tax increases may be needed to cover Emanuel’s spending plans.

“I believe we can truly say that it will happen, but it’s all in the ‘how much,’” said Austin. “Nothing is off the table, and I think we should be honest with the people to let them know that everything is being considered.”

(Editor: Bold added for emphasis)

Considering the event was organized to attack mayoral challenger Jesús “Chuy” Garcia and this City Council routinely carries water for Emanuel, I initially thought “The Rahmfather” was trying to kill two birds with one stone here- blast “Chuy” and have Alderman Austin start conditioning Chicagoans for the looming property tax hike I’ve been warning about for some time now on this blog.

Good news Rahm. Bad news City Council budget chairman.

But then I thought more about how Rahm obviously realizes talk of tax hikes is one of the “third-rails” of politics- particularly before a runoff election that’s only a few weeks away (April 7) and where “Chuy” is not too far behind in the various polls.

Plus there’s this from Hal Dardick about the incident on the Chicago Tribune website yesterday:

Austin, known for speaking off the cuff, quickly tried to qualify her property tax hike comment, saying she meant only that “everything is on the table.”

(Editor’s note: Bold added for emphasis)

Maybe this wasn’t orchestrated by Rahm?

Oh well. Smooth move or gaffe, I see it as yet more evidence of a property tax hike being just around the corner.

Plan accordingly.

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

Sources:

“Mayor Emanuel Ally: Property tax hike likely.” WGN News Desk. 10 Mar. 2015. (http://wgntv.com/2015/03/10/mayor-emanuel-ally-property-tax-hike-likely/). 10 Mar. 2015.

Dardick, Hal. “Emanuel ally: Property tax hike likely in second term.” Chicago Tribune. 9 Mar. 2015. (http://www.chicagotribune.com/news/local/politics/chi-emanuel-ally-says-property-tax-likely-in-second-term-20150309-story.html). 10 Mar. 2015.

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Tuesday, March 10th, 2015 Debt Crisis, Fiscal Policy, Government, Taxes No Comments

The Civic Federation Proposes Less Government Spending, More Taxes To Tackle Illinois’ $6.4 Billion In Unpaid Bills

Regular Survival And Prosperity readers shouldn’t be surprised to hear the following from 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. From a press release last Thursday:

In a report released today, the Civic Federation’s Institute for Illinois’ Fiscal Sustainability proposes a comprehensive five-year plan that responds to the dire reality of Illinois’ financial condition with painful, but necessary recommendations. The plan immediately stabilizes the State’s operating budget and establishes a sustainable long-term financial plan that would pay off Illinois’ unpaid bill backlog of approximately $6.4 billion. The full 56-page report is available here.

Nearly five years after the official end of the national economic downturn, Illinois is still burdened with billions of dollars in unpaid bills. The State’s five pension systems, underfunded for decades and further weakened by recession-driven investment losses, are consuming a growing share of annual operating revenues. Temporary income tax rate increases enacted in 2011 helped the State cope with these massive problems, but the higher rates began to phase out on January 1, 2015 and the State’s income tax revenues are expected to plummet by $5.2 billion between FY2014 and FY2016.

“The incomplete FY2015 budget resulted in a greater deterioration of Illinois’ finances and made the necessary actions to fix this crisis even more painful,” said Laurence Msall, president of the Civic Federation. “Illinois cannot afford such a steep rollback of its tax rates without eliminating entire areas of State services or completely restructuring the government.”

After examining the effectiveness of multiple budget scenarios based on the fundamental long-term financial goals detailed below, the Federation proposes the following recommendations as part of a comprehensive five-year plan…

In a nutshell, The Civic Federation proposes less government spending and more taxes for the State of Illinois. From that press release:

1. Fix Fiscal Cliff in FY2015: Rather than sharply dropping income tax rates by 25% in one year, the State should retroactively increase the income tax rate to 4.25% for individuals and 6.0% for corporations as of January 1, 2015. The State could then provide additional tax relief by rolling back the rates on January 1, 2018 to 4.0% for individuals and 5.6% for corporations.
2. Control State Spending: The State should restrict discretionary spending growth from the 2.7% level shown in its three-year projections to 2.0%, closer to the rate of inflation. This could reduce total State spending by $1.3 billion over five years.
3. Broaden the Income Tax Base to Include Some Retirement Income: Out of the 41 states that impose an income tax, Illinois is one of only three that exempt all pension income. To create greater equity among taxpayers, the State’s income tax base should include non-Social Security retirement income from individuals with a total income of more than $50,000.
4. Expand Sales Tax Base to Include Services: Illinois should expand its sales tax base to include a list of 32 service taxes proposed by Governor Rauner. Due to the complexity of sourcing rules and collections for new businesses that are not currently required to collect sales taxes, it is estimated this expansion could take up to two fiscal years to fully implement.
5. Temporarily Eliminate Sales Tax Exemption for Food and Non-Prescription Drugs: To provide much-needed immediate revenue, the State should temporarily eliminate the tax exemption for food and non-prescription drugs. The State should apply the full 6.25% sales tax rate to food and over-the-counter drug purchases through FY2019 and then reinstate the exemption in FY2020 after the service tax expansion is fully implemented and the State’s backlog of unpaid bills is eliminated.
6. Expand the Earned Income Tax Credit to Provide Assistance to Low Income Residents: To help soften the impact of the State’s fiscal crisis on low income residents, the Civic Federation proposes an increase in the State’s Earned Income Tax Credit from 10% of the federal credit to 15% of the federal credit by FY2018…

At this point, I wholeheartedly believe it’s just a matter of time now before a number of the above are implemented either willingly (legislatively) or forcefully (“financial reckoning day”) in the “Land of Lincoln” down the road.

As such, it might be wise for Illinoisans to start preparing (if they haven’t done so already) for an impending hit to household finances and elsewhere.

You can read the entire press release and obtain that report on The Civic Federation’s website here.

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

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Illinois Governor Bruce Rauner To Push Drastic Spending Cuts, Sales Tax Hike In Near Future?

Some local news outlets have been giving new Illinois Governor Bruce Rauner a hard time lately, claiming he’s still in “campaign mode” and not providing much in the way of tackling the state’s economic ills.

But yesterday, Illinoisans got a glimpse of one potential measure the Winnetka businessman may turn to for improving the state’s finances. Jessie Hellmann and Ray Long reported on the Chicago Tribune website Thursday:

Republican Gov. Bruce Rauner pressed a bit harder Thursday for an expansion of the Illinois sales tax as part of an agenda to right the state’s financial ship.

Using charts and graphs, Rauner explained how surrounding states use broader-based sales taxes than Illinois to take advantage of growing service economies. “We’re not competitive,” Rauner said.

The idea of expanding the state’s sales tax base to include services, such as on auto repairs, dog grooming or haircuts, has been debated in Illinois since the late 1980s. Expansion efforts repeatedly have stalled in the face of heavy resistance, but Rauner outlined how he thinks Illinois is “out of balance” with other states.

“We are not thoughtful about this,” Rauner said, adding that the Illinois sales tax is too high and too narrowly applied.

Expanding the sales tax is one of the few items Rauner repeatedly has mentioned as a part of an unspecific overhaul of the entire tax code, saying Illinois can’t “just nibble around the edges.”

(Editor’s note: Bold added for emphasis)

It’s going to take a whole lot more than a sales tax hike to turn around the state’s economic fortunes. And Governor Rauner knows that.

So what other measures could be on his agenda for the near-term?

Rich Miller discussed the governor’s visit to the University of Chicago on January 22 and wrote on the Crain’s Chicago Business website the following day:

What is crystal clear is that he won’t ask for any more revenues without first making deep and even drastic cuts.

The new governor pointed to flat population growth and flat job growth as the roots of the problem.

Without “booming” growth, he said, Illinois can never dig itself out of the hole it’s in. And Rauner always HAS said that high taxes are a hindrance to growth.

Rauner singled out two items for his chopping block. First up, Medicaid spending.

“When you realize our job growth is flat, how do you pay for it?,” Rauner said of Medicaid. “I want to do that, but that is not sustainable.” Medicaid, which pays for everything from childbirth to nursing home care, consumes a quarter of the state’s operating budget, and despite some real reforms almost two years ago, costs are continuing to rise. And that’s a problem when next fiscal year’s budget deficit is being pegged at a whopping $9 billion.

Rauner also claimed state employees make too much money, saying they earn more than private sector workers (which AFSCME rejects, pointing to a recent University of Illinois study) and are the third-highest paid in the country. The number of state workers is declining, Rauner noted, but payroll costs are still increasing. Their health insurance is based on “low contributions” from workers, but has a high cost. So, while workers aren’t chipping in much, “you’re chipping in a lot,” he told his audience…

(Editor’s note: Bold added for emphasis)

“Deep and even drastic cuts.” “Expansion of the Illinois sales tax.”

It will be interesting to watch how Illinois Democrats- who hold veto-proof supermajorities in both chambers of the Illinois General Assembly- react to such proposals if Governor Rauner goes this route.

This could get ugly real quick…

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

Sources:

Hellmann, Jessie and Long, Ray. “Rauner presses for sales tax expansion in U. of I. speech.” Chicago Tribune. 29 Jan. 2015. (http://www.chicagotribune.com/news/local/politics/ct-bruce-rauner-champaign-appearance-met-0130-20150129-story.html). 30 Jan. 2015.

Miller, Rich. “Watch out: Rauner sharpens his cleaver.” Crain’s Chicago Business. 23 Jan. 2015. (http://www.chicagobusiness.com/article/20150123/NEWS02/150129882/watch-out-rauner-sharpens-his-cleaver). 30 Jan. 2015.

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Illinois Debt Crisis Latest: $9 Billion Annual Deficit, $159 Billion In IOUs

Illinois residents are waking up to disturbing news this morning. From the “Press Room” over on the website of the Institute of Government and Public Affairs at the University of Illinois:

Illinois faces $9 billion annual deficit and $159 billion in IOUs

New analysis (PDF) by the Fiscal Futures Project finds no easy fix to Illinois’ chronic fiscal imbalance. Illinois now faces a $9 billion annual deficit that will grow to $14 billion by FY 2026.

“Years of pay-later budgeting has resulted in a massive imbalance between sustainable revenue and spending,” said Richard Dye, co-director of the Fiscal Futures Project. “Like a person in deep credit card debt, the state has been spending more than it can afford, and is covering the gap by issuing IOUs.” The report finds that the state’s IOUs now total $159 billion—more than twice the inflow of revenue in a single year. It’s a monumental problem that will require a long-term fiscal plan that includes tax increases, spending cuts, and economic growth.

The report, Apocalypse Now? The Consequences of Pay-Later Budgeting in Illinois, examines what it would take to balance the budget. The options are limited.

• Bringing back the 2011 tax increase would close only about one-half of the gap projected for the next several years.
The problem cannot be solved with spending cuts alone. Because Illinois can’t cut debt service or pension payments, it would take at least a 20 percent cut of all remaining spending to eliminate the deficit. This includes education, corrections, Medicaid, public safety, transportation, and more.
• Economic growth is also not a cure-all: an increase in the growth rate of personal income by an extra one-half percent every year for 10 years (an optimistic scenario) would only have a modest effect on the deficit.

The report concludes: “Changes in awareness, expectations, and policy are needed to restore fiscal balance in Illinois. Being saddled with paying past years’ bills means that today, Illinoisans must reduce their expectations for the services that they can expect from government and be prepared to pay more for government, now and in the future.”

(Editor’s notes: Bold added for emphasis)

Like I blogged a week ago:

A lot less government services. Much higher fees, fines and taxes.

An outcome I see for Chicago, Cook County, and Illinois residents down the road.

And plenty of Illinoisans wonder why their neighbors are high-tailing it out of the “Land of Lincoln.”

You can read a summary fact sheet or the entire report over on the IGPA website here.

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

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Chicago, Cook County, Illinois Residents: ‘Sacrifice’ Looming

A lot less government services. Much higher fees, fines and taxes.

An outcome I see for Chicago, Cook County, and Illinois residents down the road.

And based on comments made by Cook County Board President Toni Preckwinkle and new Illinois Governor Bruce Rauner yesterday, our destination is in sight. Governor Rauner said in his inaugural speech Monday:

We have an opportunity to accomplish something historic: to fix years of busted budgets and broken government; to forge a path toward long-term prosperity and a brighter future; to make Illinois the kind of state others aspire to become, a national leader in job growth and education quality.

To achieve that will require sacrifice. Sacrifice by all of us- politicians and interests groups, business and labor, those who pay for government and those who depend on government’s services. Each person here today and all those throughout the state will be called upon to share in the sacrifice so that one day we can again share in Illinois’s prosperity. We all must shake up our old ways of thinking…

The 42nd governor added later on in his address:

Illinois is our home- and right now our home is hurting. But home and family are worth sacrificing for… worth fighting for. Together, let’s do the hard work to rebuild our home…

“Sacrifice.” Call me crazy, but something tells me the burden of bailing out the “Land of Lincoln” won’t be falling upon the backs of the rich and powerful.

Cook County Board President Toni Preckwinkle also gave a speech yesterday in which she hinted at county residents having to make future sacrifices. John Byrne reported on the Chicago Tribune website Monday:

Preckwinkle gave a speech to the City Club of Chicago about her first-term achievements and laid out a blueprint for her second four years in office. Asked afterward about the likelihood she will be forced to raise taxes, Preckwinkle said only that it will be “a challenge” to meet the county’s financial obligations.

“We have significant challenges, both around the spike in our debt obligations and our pension obligations, and my charge to our chief financial officer is that he has to do everything he can to be creative in figuring out how to address these problems,” she said…

Preckwinkle crafted a $4 billion budget for 2015 that includes no new taxes, fines or fees. She has warned that the 2016 budget will be far trickier to balance because debt payments will increase and the county could need to come up with $144 million more to pay into the county workers retirement system if she gets the pension fund changes she has asked for from the General Assembly.

“I can’t predict now, because we don’t even have a pension bill, how much it’s going to cost or what it’s going to take, but it’s going to be a real challenge, I’ll say that,” she said Monday.

(Editor’s note: Bold added for emphasis)

Coupled with Chicago’s financial issues, all I can say to Chicago, Cook County, and Illinois residents at this point in time is- better start figuring out a way to cope with less government services and higher fees/fines/taxes from local and state government in the coming years. The politicians can only kick the can down the road so far.

You can read Governor Rauner’s entire inaugural address on the Chicago Sun-Times website here.

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

Source:

Byrne, John. “Preckwinkle details 2nd-term plans for Cook County.” Chicago Tribune. 12 Jan. 2015. (http://www.chicagotribune.com/news/ct-preckwinkle-second-term-agenda-met-0113-20150112-story.html). 13 Jan. 2015.

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Marc Faber: Young Americans Will Earn Less, Have Less Wealth Than Their Parents

I wrote on Survival And Prosperity a couple years ago:

Back in 2006 when I was working at a suburban fire department, a battalion chief came into my office, saw the local paper on my desk, and asked, “Did you read that piece about how kids these days might be the first generation who won’t be better off than their parents?” I replied, “Yeah, it was depressing.” The fire officer confided, “That stuff scares me. I’m worried they might be right about that.” I’d be concerned too, especially if I were the parent of a couple of young kids like this chief was.

Fast forward almost nine years after that discussion took place. Swiss-born investment advisor/money manager Marc Faber was interviewed by Barron’s last week. The publisher of the monthly investment newsletter The Gloom Boom & Doom Report talked with editor Jack Otter about a number of financial topics, including how younger people in Western societies will be less well-off than their parents. From their exchange:

OTTER: You always find new ways to depress me. And today you told me that for the first time in 200 years of history, we will bequeath to our children less wealth than their parents had.
FABER: Yes. I meant that with respect to Western societies and Japan, where essentially the younger people, today’s generation, will earn less than their parents. And they will have less wealth than their parents, inflation-adjusted, because we will have wealth taxes, we’ll have more estate taxes, and we have essentially declining real median incomes in the Western world and Japan. But the good news is that we have essentially have in the countries that opened up post-breakdown of the socialist, communist ideology- China, Soviet Union, Eastern Europe, and so forth, and India, of course- we have entire generations that will earn much more and have a much better standard of living than their parents had.

On India, “Doctor Doom”- as the financial media likes to call him- thinks that India’s stock market could rise by 15 percent in 2015.


“Dr. Doom Offers 2 Stocks Picks, But Gloomy Outlook”
Barron’s Video

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

(Editor’s notes: Info added to “Crash Prophets” page; I am not responsible for any personal liability, loss, or risk incurred as a consequence of the use and application, either directly or indirectly, of any information presented herein.)

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Potential Blowback From Chicago’s Minimum Wage Hike

In case you haven’t heard, the City of Chicago just approved a minimum wage hike for all workers in the city. From the Mayor’s Press Office on December 2:

Mayor Emanuel, City Council Approve Ordinance to Increase Minimum Wage in Chicago to $13 by 2019

City Council today passed an ordinance that will raise the minimum wage for all Chicago workers to $13 per hour by 2019. This measure, sponsored by Mayor Rahm Emanuel, Alderman Will Burns, Alderman Pat O’Connor and 31 other aldermen, will increase the earnings for approximately 410,000 Chicago workers, inject $860 million into the local economy, and lift 70,000 workers out of poverty…

On December 1, Mayor Emanuel and a group of Aldermen introduced a substitute ordinance based off of Senator Kimberly Lightford’s bill that gets the City of Chicago to a $10 minimum wage in roughly seven months, an $11 minimum wage by 2017, and to a final minimum wage of $13 by 2019, plus inflation increases after 2019.

Personally, I interpret the hike as merely an election-year ploy to help Rahm Emanuel and the siting aldermen in the upcoming February 24, 2015, Municipal General Election in Chicago. Consider the following from Joseph Erbentraut on the Huffington Post website Tuesday:

The fast-tracked plan, one of three wage-increase proposals considered by city officials this week, is backed by Mayor Rahm Emanuel in what some critics say is a political move designed to win favor with left-leaning Chicago voters ahead of the February 2015 mayoral election

(Editor’s note: Bold added for emphasis)

While it’s nice to think a number of Chicago workers will be getting raises, the potential blowback could be significant. And Chicago residents may be on the receiving end. Back on June 22, 2014, I was reading the latest issue of The Sovereign Society’s weekly electronic publication the Sovereign Digest. Jeff Opdyke and Erika Nolan commented on the nationwide push for minimum wage hikes. They noted:

All over the country, unwise politicians are pushing a misguided “living wage” agenda that’s driving minimum wages higher. Seattle, for instance, just recently approved a $15-per-hour minimum, which is already biting the city in the butt in two ways. First, as I and anyone with two brain cells to rub together rightly pointed out, companies are finding that low-level managers now want pay raises, too, to rightly keep their pay commensurately above the people they’re managing. Doh! And other companies are imposing a “living wage tax” on consumers to cover the rising labor costs. As both of those trends spread — and they will — a form of inflation creeps into the system more broadly.

(Editor’s note: Bold added for emphasis)

As the above relates to the “Windy City”- Chicagoans should be prepared to pay higher prices for certain items/services.

There’s one more way Chicago residents may be impacted directly and adversely by the minimum wage hike. Sparing readers the simple economics involved with Tuesday’s action down at City Hall, a number of Chicago business owners- realizing now or later the disadvantage they’re at compared to competitors outside city limits- will be shuttering their stores shortly or down the road- either by choice or not- as a result of this hike.

Shuttered businesses= lost revenue via fees/taxes for the City

Something else to chew on. The country is just about due for an economic recession (against which the government and Fed have mostly run out of “bullets” due to the economic crisis late last decade). Forcing raises on a number of Chicago businesses still smarting from the so-called “Great Recession” could be a death sentence for them.

As for those workers in the city who will supposedly benefit from the minimum wage hike? Regrettably, pink slips could be a real possibility for a number of them.

In summary, there’s a good chance the City of Chicago, Chicago residents, and minimum wage workers in the city are ultimately going to get stung by Tuesday’s political theater. And the pain could be coming sooner than later. Just don’t expect City Hall and their friends in the mainstream media to publicize the debacle if/when it goes down.

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

Source:

Erbentraut, Joseph. “Chicago City Council Approves Plan For $13 Minimum Wage Despite Opposition.” Huffington Post. 2 Dec. 2014. (http://www.huffingtonpost.com/2014/12/02/chicago-minimum-wage_n_6255436.html). 3 Dec. 2014.

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Chicago’s 2015 Budget Includes Tax And Fee Hikes

Gee, who could’ve anticipated new fee and tax hikes look to be in store for Chicago next year?

From Fran Spielman over on the Chicago Sun-Times website this morning:

[Chicago Mayor Rahm] Emanuel will campaign for re-election on a budget that raises $62.4 million through “targeted” tax hikes and closing “loopholes,” which amounts to the same thing.

People who live, work and play in Chicago will be paying more for everything from parking and vehicle leasing to cable television and stadium skyboxes…

(Editor’s note: Bold added for emphasis)

These individuals have been doing that for a number of years now. Hal Dardick pointed out over on the Chicago Tribune site:

As the Chicago City Council prepares to approve his latest budget Wednesday, Mayor Rahm Emanuel repeatedly has reminded voters that he didn’t raise city property taxes during his first four years in office.

But that doesn’t mean homeowners haven’t had to pay. Under Emanuel, vehicle stickers cost more. Cable TV and phone taxes went up. And water and sewer fees increased significantly…

Taken together, Emanuel’s hikes mean the typical Chicago family will pay about $481 more to the city next year than it did in 2011. That’s the equivalent of a typical Chicago homeowner paying 60 percent more in city property taxes, which are nearly $800 a year for city and library services on a $250,000 home…

(Editor’s note: Bold added for emphasis)

“Nearly $800 a year for city and library services on a $250,000 home”

In the Chicago neighborhood I recently moved out of, I’m not sure if any inhabitable houses at that price range with more than 2 bedrooms/1 bath even exists. So I’m guessing a number of my old neighbors- who already shoulder a significant tax burden for the city- will be somewhat pissed to hear of this “good news” coming out of City Hall.

That being said, it’s not exactly Chicago’s “financial reckoning day” we’re talking about here. But it’s probably not what Chicagoans want to deal with as the holiday season kicks-in.

As for the well-publicized pension crisis going on in the “Windy City,” Spielman added:

By December, 2015, the City Council must decide whether to raise property taxes — or find other new revenues — to fund a state-mandated, $550 million payment to shore up police and fire pension funds.

(Editor’s note: Bold added for emphasis)

So a property tax hike might also be coming down the pipeline.

One more thing. Regarding the ongoing manpower shortage in the Chicago Police Department? That doesn’t look like it’s going to be resolved in 2015. From the Sun-Times piece:

Once again, the mayor’s budget includes only enough money to keep pace with retirements. It also includes roughly $70 million in police overtime, down from $100.3 million in 2013 and a projected $95 million this year…

(Editor’s note: Bold added for emphasis)

“Crime is down!” Yeah, whatever.

As always, I’m glad to see Fran Spielman and Hal Dardick are on top of their game.

What does all this mean for Chicago residents/workers/visitors?

It’s probably wise to budget a good deal more money for anything city-related next year. Even more so in 2016 considering what could be in store with the city’s public pension mess and what Cook County is telegraphing these days (blogged about Monday).

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

(UPDATE: The Chicago City Council approved Mayor Emanuel’s proposed 2015 city budget Wednesday by a vote of 46-4, and “puts off dealing with the city’s most vexing financial woes until after next year’s elections” according to the Tribune Thursday morning)

Sources:

Spielman, Fran. “Chicago City Council set to pass Emanuel’s $7.3 billion budget.” Chicago Sun-Times. 19 Nov. 2014. (http://politics.suntimes.com/article/chicago/chicago-city-council-set-pass-emanuels-73-billion-budget/wed-11192014-742am). 19 Nov. 2014.

Dardick, Hal. “Higher Emanuel fees and taxes add up.” Chicago Tribune. 19 Nov. 2014. (http://www.chicagotribune.com/news/local/politics/ct-emanuel-budget-2015-met-20141118-story.html#page=1). 19 Nov. 2014.

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Global Economy Flashes Warning Signals

I’m picking up on a growing number of “bad vibes” about the global economy these days.

First, Rich Miller reported on the Bloomberg website Thursday about the findings of the latest Bloomberg Global Poll of international investors:

The world economy is in its worst shape in two years, with the euro area and emerging markets deteriorating and the danger of deflation rising, according to a Bloomberg Global Poll of international investors.

A plurality of 38 percent of those surveyed this week described the global economy as worsening, more than double the number who said that in the last poll in July and the most since September 2012, when Europe was mired in a recession.

Much of the concern is again focused on the euro area: Almost two-thirds of those polled said its economy was weakening…

Europe isn’t the only source of concern in the global economy, according to the quarterly poll of 510 investors, traders and analysts who are Bloomberg subscribers. More than half of those contacted said conditions in the BRIC economies — Brazil, Russia, India and China — are getting worse, compared with 36 percent who said so in July.

(Editor: Bold added for emphasis)

Granted, it’s just a poll. But there’s also this from British Prime Minister David Cameron in a piece he penned that was published on The Guardian (UK) website Sunday:

Six years on from the financial crash that brought the world to its knees, red warning lights are once again flashing on the dashboard of the global economy.

As I met world leaders at the G20 in Brisbane, the problems were plain to see. The eurozone is teetering on the brink of a possible third recession, with high unemployment, falling growth and the real risk of falling prices too. Emerging markets, which were the driver of growth in the early stages of the recovery, are now slowing down. Despite the progress in Bali, global trade talks have stalled while the epidemic of Ebola, conflict in the Middle East and Russia’s illegal actions in Ukraine are all adding a dangerous backdrop of instability and uncertainty…

(Editor’s note: Bold added for emphasis)

Cameron added the following, which I thought was pretty funny (disturbing?):

When we faced similar problems in recent years, too many politicians offered easy answers, thinking we could spend, borrow and tax our way to prosperity. Those were the wrong answers then; they are the wrong answers now. We are not going to repeat the mistakes of the past…

(Editor’s note: Bold added for emphasis)

Sound like any country you know?

Finally, exacerbating fears about global economic health was the following “shock” announcement. Mitsuru Obe and Eleanor Warnock reported on The Wall Street Journal website this morning:

Japan Falls Into Recession

Japan’s economy shrank for a second quarter in a row, after a sales-tax increase took the steam out of Prime Minister Shinzo Abe ’s bid to turn Japan into a global model of revival.

Mr. Abe, who has sought to revive the world’s third-largest economy after two mostly sluggish decades, is set to announce this week that he will delay plans to raise the nation’s sales tax next year and call elections in December…

“Two mostly sluggish decades”

Some really bright financial-types suspect Japan’s so-called “zombie economy” is what’s ultimately in store for America. While I have no doubt about a coming U.S. economic crash, I remain somewhat more optimistic for the country’s prospects upon emerging from the coming carnage.

Stay tuned…

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

Sources:

Cameron, David. “David Cameron: Red lights are flashing on the global economy.” The Guardian. 16 Nov. 2014. (http://www.theguardian.com/commentisfree/2014/nov/16/red-lights-global-economy-david-cameron). 17 Nov. 2014.

Miller, Rich. “World Economy Worst in Two Years, Europe Darkening, Deflation Lurking: Global Investor Poll.” Bloomberg.com. 13 Nov. 2014. (http://www.bloomberg.com/news/2014-11-13/world-outlook-darkening-as-89-in-poll-see-europe-deflation-risk.html). 17 Nov. 2014.

Obe, Mitsuru and Warnock, Eleanor. “Japan Falls Into Recession.” The Wall Street Journal. 17 Nov. 2014. (http://online.wsj.com/articles/japan-falls-into-recession-1416182404). 17 Nov. 2014.

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2015 Cook County Budget Holds Line On Taxes, Fines, And Fees- For Now

Cook County residents dodged a bullet this time around.

John Byrne and Hal Dardick reported on the Chicago Tribune website Friday:

Cook County Board President Toni Preckwinkle on Friday won easy approval for her $4 billion 2015 budget proposal that includes no new taxes, fines or fees

(Editor’s note: Bold added for emphasis)

For now. Byrne and Dardick added:

Preckwinkle earlier this year warned that the 2016 budget will be far more difficult to balance because debt payments will grow and the county will need to pay $144 million more into the county workers’ retirement system if she secures the pension fund changes she seeks from the General Assembly…

(Editor’s note: Bold added for emphasis)

Regular readers of Survival And Prosperity know I suspect those “new taxes, fines, or fees” are coming soon. I wrote back on May 22:

Last week, I blogged about the possibility of property and/or sales taxes going up soon in Cook County, Illinois. Dave McKinney and Brian Slodysko reported on the Chicago Sun-Times website on May 13 the hikes might occur as part of a pension “reform” bill.

Hal Dardick and Monique Garcia added on the Chicago Tribune website tonight:

Cook County Board President Toni Preckwinkle hit Springfield Thursday to try to build support for changes to the county pension plan that she says would halt its ongoing decline toward insolvency.

She met with Senate President John Cullerton House Speaker Michael Madigan, both Chicago Democrats, and also Republican legislative leaders. “I think she’s got a good chance to pass this bill,” Madigan said afterward…

Although Preckwinkle has not identified how she would pay for her plan, it calls for the county to put $144 million a year into the pension fund. If funded with property taxes, that would cost the average homeowner up to $65 more a year, starting in 2017, according to one internal county document the Tribune obtained.

Preckwinkle, however, said Wednesday that she has closed even larger budget gaps through cuts and other, smaller scale tax and fee increases without raising property taxes — while also lowering the county sales tax by a half-cent on the dollar…

(Editor’s note: Bold added for emphasis)

Yet, McKinney and Slodysko wrote last week:

County officials do not believe they can cut enough from the budget to cover the cost, the source said…

(Editor’s note: Bold added for emphasis)

Only a matter of time now before those hikes kick in. As I also noted in that May post:

What’s that line I keep repeating on this blog?

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

As much as I hate saying it, that’s what Chicago and Cook County residents should be preparing themselves for down the road.

I’d say that probably applies to all Americans, come to think of it.

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

Source:

Byrne, John and Dardick, Hal. “Preckwinkle wins easy approval of $4 billion budget.” Chicago Tribune. 14 Nov. 2014. (http://www.chicagotribune.com/news/ct-cook-county-budget-met-1115-20141114-story.html). 17 Nov. 2014.

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Flee Chicago By The End Of 2015?

April 7, 2015.

That’s the date of the next Municipal Runoff and Supplementary Aldermanic Election in the wake of the February 24, 2015, Municipal General Election in the city of Chicago, Illinois.

And that would be the ideal deadline for moving out of the “Windy City” if I still lived there due to the likelihood of fees, fines, and taxes being hiked (even more than they already have) shortly thereafter, along with additional government “belt-tightening.”

If not April 7, definitely by the end of the year. Hal Dardick reported on the Chicago Tribune website right before the weekend:

Mayor Rahm Emanuel and aldermen won’t grapple this fall with the financial reckoning the city faces over its underfunded police and fire pension systems, budget officials acknowledged Thursday.

Instead, the Emanuel administration plans to take advantage of a state law that gives it until December 2015 to decide to make changes to its property tax levy. For years, both the current and former mayor have been saying property taxes would have to be hiked or services drastically cut to come up with the extra $550 million.

By the end of next year, the February city elections and any potential April runoffs will be history. Delaying a decision also will buy the city more time to get the General Assembly to enact pension changes that could significantly reduce the required payments to the two retirement funds..

(Editor’s note: Bold added for emphasis)

Fine. So the Illinois General Assembly votes to allow the City of Chicago to “kick the can down the road” on its pension fund payments. The well-publicized crisis isn’t going anywhere, as the public sector retirees are still owed their money.

(Editor’s note: Check out this graphic on the Tribune website showing Chicago’s pension debt rank compared to the 25 largest U.S. cities and Puerto Rico. It’s disturbing.)

And how about that “Sword of Damocles” hanging over the city’s head in the form of long-term debt it’s on the hook for? Fran Spielman reported on the Chicago Sun-Times website on July 26, 2013:

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. More than a decade ago, the debt load was $9.6 billion or $3,338 per resident.

(Editor’s note: Bold added for emphasis)

Remember- those figures were from a year ago. Updated numbers should be out shortly.

Yep. If I hadn’t departed the city like I did last year, I’d be making plans to leave Chicago by the end of 2015 at the latest.

But that’s me. I understand individual circumstances vary, and there are residents who can’t leave or choose not to.

Despite what others may think, I have an idea this group can still weather the coming storm if they’re really up to the task. I’m guessing it will be somewhat harder though residing in a city already burdened with significant financial problems when challenging times arrive.

More about this in future posts…

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

Sources:

Dardick, Hal. “Chicago’s day of reckoning over pensions delayed.” Chicago Tribune. 1 Aug. 2014. (http://www.chicagotribune.com/news/watchdog/ct-rahm-emanuel-budget-hole-met-0801-20140801-story.html). 5 Aug. 2014.

Spielman, Fran. “City of Chicago’s cash cushion plummets, debt triples, arrests drop, water use rises.” Chicago Sun-Times. 26 July 2013. (http://www.suntimes.com/21552920-761/city-by-the-numbers-cash-cushion-plummets-debt-triples-arrests-drop-water-use-rises.html). 5 Aug. 2014.

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