credit ratings

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

Chicago’s financial health is still pretty bleak in 2015.

Almost one year ago to this day, I blogged about bond credit rating giant Moody’s Investor Service downgrading the City of Chicago’s general obligation (GO) and sales tax ratings to Baa1 from A3, affecting $8.3 billion of GO and sales tax debt. I added last March:

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.”

Just before the weekend, Moody’s downgraded Chicago’s credit rating yet again. The Global Credit Research division announced on the Moody’s website under “Ratings News” Friday:

Rating Action: Moody’s downgrades Chicago, IL to Baa2; maintains negative outlook

Baa2 applies to $8.3B of GO debt, $542M of sales tax debt, and $268M of motor fuel tax debt

New York, February 27, 2015 — Moody’s Investors Service has downgraded to Baa2 from Baa1 the rating on the City of Chicago, IL’s $8.3 billion of outstanding general obligation (GO) debt, $542 million of outstanding sales tax revenue debt, and $268 million of outstanding or authorized motor fuel tax revenue debt. We have also downgraded to Speculative Grade (SG) from VMIG 3 the short-term rating on the city’s outstanding Sales Tax Revenue Refunding Bonds, Variable Rate Series 2002. The outlook on the long-term ratings remains negative…

“The outlook on the long-term ratings remains negative”

Kind of hard to get excited about the “Windy City’s” prospects after reading that.

To be fair, some are suggesting the credit rating downgrades are being influenced by City Hall in order to avoid meeting certain financial obligations (i.e., Chicago’s well-publicized public pension crisis).

“We ain’t got it.”

You can read the entire Moody’s press release on their website here.

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

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Illinois Named Worst-Run State In America In 2014

“‘We don’t have the time to mess around. We are in deep, deep trouble financially,’ [Illinois Governor-elect Bruce] Rauner told a meeting of the Illinois Farm Bureau at a downtown Chicago hotel. ‘The next 24 months are going to be rough. And I apologize. I ain’t going to be Mr. Popularity for a little while. That’s OK. Four years from now I think, though, everybody will appreciate what we did.’”

Chicago Tribune website, December 8, 2014

Talk about lists you don’t want to be on. In 2012 and 2013, Illinois was the 3rd worst-run state in the annual best- and worst-run states in America survey conducted by New York City-based financial news and opinion organization 24/7 Wall St.

So how did the “Land of Lincoln” fare in 2014? From the 24/7 Wall St. website on December 3:

How well run is your state? Assessing a state’s management quality is hardly easy. The current economic climate and standard of living in any given state are not only the results of policy choices and developments that occurred in the last few years, but can also be affected by decisions made decades ago, and by forces outside a state’s control.

Each year, 24/7 Wall St. attempts to answer this question by surveying various aspects of each state. To determine how well states are managed, we examine key financial ratios, as well as social and economic outcomes. This year, North Dakota is the best-run state in the country for the third consecutive year, while Illinois replaced California as the worst-run state

(Editor’s note: Bold added for emphasis)

Ouch. Worst part is, the people who brought us this mess are the same ones still in charge, more or less. It will be interesting to see how much of a difference Governor-elect Rauner- who ran on the Republican ticket- can make in the Democrat-controlled state.

24/7 Wall St. went into more detail about my home state’s latest “honor.” From the piece:

Illinois is the worst-run state in the nation. Like many other low-ranked states, more people left Illinois than moved there. Illinois lost more than 137,000 residents due to migration between the middle of 2010 and July 2013. A poor housing market may partly explain the exodus. Median home values fell 16.2% between 2009 and 2013, the second largest drop nationwide. Illinois has extremely poor finances by many measures. Just 39.3% of Illinois’ pension liabilities were funded as of 2013, worse than any other state. Further, the state’s reserves are estimated at just 0.5% of its general fund expenditure, the second lowest reserves rate nationwide. Both Moody’s and S&P gave Illinois the worst credit ratings of any state, at A3 and A- respectively. According to Moody’s, the state’s rating reflects its low fund balances and high pension obligations, as well as its “chronic use of payment deferrals to manage operating fund cash.”

As for our neighbors, Indiana is ranked 28th and Wisconsin comes in at 26th in 2014- down from 19th and 21st- respectively.

That’s quite a hit (9 places) the Hoosiers took from last year. Wonder what’s behind the drop?

Curious as to where 24/7 Wall St. ranked your state in 2014? Head on over to their website here.

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

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Cook County Residents To Get Hit With Tax Hikes Soon?

For a while now (last time being earlier this week), I told my girlfriend we were lucky to have escaped the fiscal debacle and revenue grab going on in the city of Chicago.

At the same time, I pointed out that as Cook County residents we’re still on the hook for the same type of nonsense.

Brian Slodysko reported on the Chicago Sun-Times website yesterday afternoon:

Hoping to ward off another credit rating downgrade, Cook County Board President Toni Preckwinkle said Wednesday that she will soon present a plan to reform the county’s underfunded pension system.

And she’s leaving the door open to hiking property, sales and other taxes.

When asked repeatedly about the possibility of tax increases, Preckwinkle responded: “We’re looking at all the options. Everything is on the table.”

(Editor’s note: Bold added for emphasis)

Slodysko added later in the piece:

Preckwinkle declined to discuss specifics, but she did say that any plan that goes before the Legislature will not have property tax increase language written into the bill

(Editor’s note: Bold added for emphasis)

Okaaay… so that means Preckwinkle’s not “leaving the door open” to hiking property taxes?

Regardless, based on what I see coming down the line for us, it’s only a matter of time.

Last summer, Cook County saw its bond rating lowered by one of the major credit rating agencies supposedly due to its public pension liabilities. I blogged on August 20, 2013:

In the wake of significantly downgrading the City of Chicago’s credit rating, bond credit rating giant Moody’s Investor Service lowered Cook County’s bond rating a notch last Friday. In a news release from the Moody’s website right before the weekend:

New York, August 16, 2013 — Moody’s Investors Service has downgraded the rating on Cook County’s (IL) general obligation (GO) debt to A1 from Aa3, affecting $3.7 billion of general obligation debt. The outlook remains negative.

SUMMARY RATING RATIONALE

The downgrade of the GO rating reflects Cook County’s growing pension liabilities…

(Editor’s note: Bold added for emphasis)

Stay tuned…

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

Source:

Slodysko, Brian. “Preckwinkle won’t rule out tax increase to strike pension deal.” Chicago Sun-Times. 9 Apr. 2014. (http://politics.suntimes.com/article/chicago/preckwinkle-wont-rule-out-tax-increase-strike-pension-deal/wed-04092014-523pm). 10 Apr. 2014.

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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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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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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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Illinois State Lawmakers To ‘Fix’ $100 Billion Public Pension Crisis Tuesday?

Tuesday looks to be an important day for the future of Illinois.

State lawmakers may vote on legislation to “fix” a well-publicized $100 billion public pension crisis. Rick Pearson and Bob Secter wrote on the Chicago Tribune website yesterday:

Illinois lawmakers return to Springfield on Tuesday to consider an agreement struck by legislative leaders that aims to fix the state’s massive government worker pension as Senate Democrats have become the focal point for intensive lobbying efforts…

The pension vote is shaping up to be one of the most important votes of lawmakers’ careers, with senators and representatives forced to decide which is better for their political self-interest: Backing up their powerful leaders or siding with the re-election might of public employee unions.

At stake is Illinois’ $100 billion pension shortfall that affects teachers outside Chicago, public university employees and state government workers. The worst-in-the-nation deficit is gobbling up tax money that otherwise could go to education and other programs, and has resulted in Illinois holding the lowest credit rating among the states. Illinois’ pension problem also is being blamed in part for the state’s struggling economy and high unemployment.

The agreement leaders reached the day before Thanksgiving aims at saving the state $160 billon over 30 years to get the pension systems fully funded, largely by limiting annual cost-of-living increases and raising the retirement age while also requiring the state to put its share of money into the system.

Not surprisingly, beneficiaries of the current setup aren’t too happy with these rapidly-unfolding developments. Francine Knowles reported on the Chicago Sun-Times website yesterday:

Details of the pension deal reached by four House and Senate leaders and headed for a vote this week have supporters and critics in full-court press mode.

Union leaders, who are blasting the agreement, say their members will bombard lawmakers Monday, urging them to kill the proposed bill that could ultimately slash $160 billion from the state’s future pension liabilities and improve Illinois’ damaged creditworthiness.

Opponents of the yet-to-be-seen legislation will argue that it’s unconstitutional, among other things. Pearson and Secter added:

Any final package approved by the legislature and governor faces an almost certain legal challenge. Critics will go into court armed with a provision of the 1970 Illinois Constitution that defines pension benefits as “an enforceable contractual relationship” that “shall not be diminished or impaired.”

I’m not sure what to make of all this yet, except that the present course the State is on concerning public sector pensions is unsustainable (costing taxpayers $5 million a day as I noted back on October 21) and that any legislation passed will probably end up being legally contested.

More Wednesday…

Sources:

Pearson, Rick and Secter, Bob. “Senate Democrats under the gun on proposed pension fix.” Chicago Tribune. 30 Nov. 2013. (http://www.chicagotribune.com/news/local/ct-illinois-pension-reform-met-1201-20131201,0,7850446.story). 1 Dec. 2013.

Knowles, Francine. “Pension deal faces pushback from unions; backers pursue votes.” Chicago Sun-Times. 30 Nov. 2013. (http://www.suntimes.com/24073242-761/pension-deal-faces-pushback-from-unions-backers-pursue-votes.html). 1 Dec. 2013.

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

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Moody’s Downgrades Chicago Transit Authority Bonds From Aa3 to A1, Says Outlook Negative

Moody’s Investors Service has dealt Chicago another ratings blow. In this case, it’s the Chicago Transit Authority. From a Global Credit Research news release last Friday:

New York, October 25, 2013 — Moody’s Investors Service has downgraded the Chicago Transit Authority’s $2.9 billion outstanding sales tax revenue bonds to A1 from Aa3 and revised the outlook to negative from stable. Also affected are approximately $77 million of authority lease bonds issued by the Chicago Public Building Commission, which have been downgraded to A2.

According to Moody’s rating scale, this CTA debt has gone from being “high quality” and “subject to very low credit risk” to “upper-medium grade” and “subject to low credit risk.”

The well-known credit rating agency added:

The rating assigned to the Chicago Transit Authority (CTA) sales-tax backed debt has relied partly on active management — the ability to increase pledged revenue to allow for new debt and to maintain debt-service coverage. Two main factors now indicate weaker CTA credit quality. First, in view of growing credit pressures on Chicago (A3/negative), Cook County (A1/negative), and the State of Illinois (A3/negative), we believe the political will to impose further revenue increases has diminished. Second, the CTA system faces growing deferred maintenance and capital needs that will require funding from new debt issuance and other sources, at a time when state and federal support is likely to dwindle. Despite the recent improvement in pledged revenues driven by the national economic recovery, debt service coverage levels are likely to decrease in coming years. A backlog of pledged state matching payments, though recently reduced, will remain a long-term challenge and may be exacerbated by impending state income tax cuts and the state’s massive pension deficits. CTA’s own increasing pension challenges may strain its operating budget. Together, these factors have added to the importance of distinctions between CTA’s sales-tax bonds and those issued by the Regional Transportation Authority (RTA, Aa3/stable), a transit oversight body with a prior claim on the same regional sales taxes and a more conservative additional debt limit.

You can read the entire news release on the Moody’s website here.

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

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Monday, October 28th, 2013 Bonds, Credit, Government, Taxes, Transportation No Comments

Dallas Fed Says ‘Great Recession’ Cost U.S. Between $6 Trillion And $14 Trillion

Earlier today, I got wind of a new research publication from David Luttrell, Tyler Atkinson, and Harvey Rosenblum over at the Federal Reserve Bank of Dallas.

Their study looked at the “cost,” or value of what American society gave up, during the recent “Great Recession.”

From “Assessing the Costs and Consequences of the 2007–09 Financial Crisis and Its Aftermath”:

A confluence of factors produced the December 2007–June 2009 Great Recession—bad bank loans, improper credit ratings, lax regulatory policies and misguided government incentives that encouraged reckless borrowing and lending.

The worst downturn in the United States since the 1930s was distinctive. Easy credit standards and abundant financing fueled a boom-period expansion that was followed by an epic bust with enormous negative economic spillover.

Despite extensive reviews of the causes and consequences of the most recent financial crisis, there are few estimates of what it cost—the value of what society gave up. Such a figure would help determine the relative expense of policy proposals designed to avoid future crises.

Luttrell, Atkinson, and Rosenblum’s estimate of what the financial crisis cost?

Between $6 trillion and $14 trillion.

It’s an interesting read, and just like tomorrow’s 12th anniversary of the 9/11 terror attacks, a stark reminder of that tumultuous latter part of the decade and what misguided economic policies did and will do again to “too big to fail” America.

And keep this in mind:

The jokers that caused that mess are the same ones still trying to clean it up.

Some say “recovery.” I say, “papered-over.”

Anyway, the research can be read in its entirety over at the Dallas Fed’s website here.

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

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Chicago ‘National Poster Child For Financial Distress’?

Whew. After spending a good deal of the day Saturday at a birthday party for one of my girlfriend’s sisters, I was pretty sore the next morning when I hobbled down my driveway to retrieve the Sunday paper. After a little breakfast, I busted out the “Business” section of the Chicago Tribune and read the following in the weekly finance/investing column by Gail MarksJarvis. She wrote:

Chicago is receiving the type of notoriety no city would want. And its reputation is undermining investments individuals have made in the city’s municipal bonds.

Chicago has become a national poster child for financial distress in the aftermath of the Detroit bankruptcy, as bond analysts have been warning investors about cities and states that could be financially risky in the future.

(Editor’s note: Italics added for emphasis)

Whoa! My reaction was similar to comedian Jeff Foxworthy’s when an audience member approached him and asked if he would be interested in hearing a story about a beaver biting off a man’s nipple:

“Okay, you’ve got my undivided attention.”

Now, it’s not like MarksJarvis is one of those financial “journalists” who see America- especially Obama’s America- through rose-colored glasses and dare not scratch the surface of an economic portrait constructed by a government which has a history of tinkering with the reporting that not surprisingly ends up looking more positive. Unlike these Pollyannas- I have no beef with MarksJarvis and read her column when I get the time (along with Tribune real estate reporter Mary Umberger).

MarksJarvis continued:

“Between Chicago’s appalling murder rate, blubbery unfunded pensions and ratings downgrades, don’t touch this credit with a 10 foot pole,” Marilyn Cohen, chief executive of Envision Capital, wrote in a report to clients this week.

The Los Angeles-based bond manager warned individuals not to be lured by the extra yield they can earn by taking chances on risky cities and states.

“Illinois, Chicago and Puerto Rico are on the bottom of the barrel,” she said. “The Chicago murder rate is a symptom of the city unable to grapple with its problems or its pension debacle. The unions have a stranglehold on the city and state and no one has been willing to raise revenue or do what needs to be done.”

Cohen is just one of many analysts waiving red flags over Chicago municipal bonds since Detroit filed for bankruptcy and made investors aware that large U.S. cities may become so troubled that individuals can lose money in general obligation bonds they assumed were rock solid.

(Editor’s note: Italics added for emphasis)

Funny. From what I’ve heard/read, Cohen might want to look at tossing her home state of California into that barrel as well.

Regardless, a no-holds-barred assessment of Chicago and Illinois as it relates to their bonds.

“Don’t touch this credit with a 10 foot pole.”

Ouch!

Oh well. It’s money we’re talking about here.

“No time for love, Dr. Jones.”

Now, after Detroit filed for bankruptcy last month, a number of people rushed to Chicago’s defense against claims the “Windy City” might be/is on the path of becoming the next “Motor City.” From my Sunday paper:

Bond analysts note that if the city can’t control crime and residents move out, Chicago eventually could face the urban flight issue that left Detroit with the need to spend more on safety while the number of homeowners paying taxes was in decline.

“Chicago eventually could face the urban flight issue.”

It’s an issue already on the table. Not only has it happened before (I once worked with a suburban firefighter whose family made the difficult choice of leaving Chicago’s deteriorating West Side in the late 60s-early 70s for the northwest suburban “boonies” at that time), but the argument can be made that’s it’s starting again, as I type away on my keyboard here in my new home office (in progress) in the northwest suburbs and knowing of other ex-city dwellers who’ve departed what they feel has become “Rahmabad” (as I just heard Chicago being referred to this weekend) while making their presence known on alternative media sites like Second City Cop and others.

While not a flood, there’s a trickle.

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

Source:

MarksJarvis, Gail. “MarksJarvis: Chicago gives investors another reason to rethink municipal bonds.” Chicago Tribune. 4 Aug. 2013. (http://articles.chicagotribune.com/2013-08-04/business/ct-biz-0804-gail-bonds–20130804_1_municipal-bonds-municipal-market-advisors-matt-fabian). 4 Aug. 2013.

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Chicago’s Really Bad Week

The past week has been quite a crappy one for Chicago, Illinois, as it concerns their finances and schools. But none of the bad news should surprise regular readers of this blog. From the website of bond credit rating giant Moody’s Investor Service late Wednesday night:

Moody’s Investors Service has downgraded the City of Chicago’s (IL) 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. Chicago has $7.7 billion of GO debt, $566 million of sales tax debt, $2.0 billion of water revenue debt, and $1.3 billion of sewer revenue debt outstanding. The outlook on all ratings is negative.

It wasn’t long ago that I blogged about Moody’s warning the “Windy City” of a possible credit rating downgrade. From their website on April 17, 2013:

Moody’s has announced its final approach to the way it will analyze and adjust pension liabilities as part of its credit analysis of state and local governments. These changes reflect the rating agency’s view that pension obligations are a significant source of credit pressure for governments and warrant a more conservative view of the potential size of the obligations. As a result of this new approach, Moody’s has also placed the general obligation ratings of the cities of Chicago, Cincinnati, Minneapolis, and Portland, OR, and of 25 other US local governments and school districts on review for possible downgrade. The entities whose ratings have been placed on review have large adjusted net pension liabilities relative to their rating category…

Moody’s rates over 8,000 local governments in the United States. Less than 1% of those with general obligation or equivalent ratings have been placed under review because of the new pension adjustments.

I’ve been pointing out Chicago’s financial woes for some time now- despite City Hall’s claim that “all’s well.” I wrote on July 25, 2012:

There’s good news and bad news out concerning Chicago’s finances.

The good news is that the city has more cash on hand these days due to Mayor Rahm Emanuel’s cost-cutting.

The bad news is that the Windy City is falling deeper into debt.

Fran Spielman wrote on the Chicago Sun-Times website Sunday:

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.

(Editor’s note: Italics added for emphasis)

The City of Chicago’s response? From the piece:

“Is it troubling? The answer is, ‘no.’ We still have a very strong bond rating. Our fiscal position is getting better every year and we are aggressively managing our liabilities and obligations,” City Comptroller Amer Ahmad said Friday, the same day that Moody’s Investor’s Service downgraded $6.8 billion in O’Hare Airport bonds.

So much for that “very strong bond rating.”

As for the Chicago public schools? Remember this post from September 13, 2012?:

By now, many of you have probably heard about the teachers strike going on in Chicago. Day 4 and counting. While many Chicago public school teachers are probably worth every red cent of the $71,017 median salary they command- and more- when all things are considered, considering the precarious financial situation of the Chicago Public Schools, a larger crisis looks to be right around the corner. Rosalind Rossi wrote on the Chicago Sun-Times website yesterday:

As school and union leaders wrestled over a new teachers contract Tuesday, a huge, nagging question loomed in the background:

Once they finish, how will Chicago Public Schools pay for any new contract they forge?

There’s no easy give in the budget, because CPS already depleted its rainy day “reserve” fund to help plug a $665 million deficit this school year.

And if officials eke out enough cuts to pay for the cost of teacher raises this school year, a $1 billion deficit — and no “reserve” cushion — awaits them next school year, when a pension relief package expires.

(Editor’s note: Italics added for emphasis)

$1 billion deficit next year and no reserve funds left?

Besides significant cuts, there’s already been talk of massive teacher layoffs, larger class sizes, and higher taxes being required in the near future.

Time will tell how this all plays out.

Time looks to be up. From Noreen S. Ahmed-Ullah and Kim Geiger on the Chicago Tribune website this morning:

Citing a $1 billion budget deficit, Chicago Public Schools will lay off more than 2,000 employees, more than 1,000 of them teachers, the district said Thursday night.

About half of the 1,036 teachers being let go are tenured. The latest layoffs, which also include 1,077 school staff members, are in addition to 855 employees — including 420 teachers — who were laid off last month as a result of the district’s decision to close 49 elementary schools and a high school program.

I love Chicago, and I wish only the best for the neighbors I just recently left behind. But one word comes to mind right now as I look back at everything I’ve just typed:

Devolution.

Here’s hoping next week is a better one for the “City by the Lake.”

You can read the Moody’s downgrade notice on their website here.

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

Source:

Geiger, Kim and Ahmed-Ullah, Noreen S. “CPS lays off more than 2,000, including 1,000 teachers.” Chicago Tribune. 19 July 2013. (http://www.chicagotribune.com/news/education/ct-met-cps-layoffs-20130719,0,4180625.story). 19 July 2013.

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City Of Chicago On Review For ‘Possible Downgrade’ By Moody’s

“We still have a very strong bond rating. Our fiscal position is getting better every year and we are aggressively managing our liabilities and obligations.”

-City of Chicago Comptroller Amer Ahmad, July 20, 2012, as noted in a July 22, 2012, Chicago Sun-Times article

I’ve been warning Survival And Prosperity readers for some time that the City of Chicago’s finances are not as peachy keen as City Hall would like outsiders to believe.

So much so, the City’s credit rating is on review for a possible downgrade by Moody’s Investors Service. From the Moody’s website earlier today:

Moody’s has announced its final approach to the way it will analyze and adjust pension liabilities as part of its credit analysis of state and local governments. These changes reflect the rating agency’s view that pension obligations are a significant source of credit pressure for governments and warrant a more conservative view of the potential size of the obligations. As a result of this new approach, Moody’s has also placed the general obligation ratings of the cities of Chicago, Cincinnati, Minneapolis, and Portland, OR, and of 25 other US local governments and school districts on review for possible downgrade. The entities whose ratings have been placed on review have large adjusted net pension liabilities relative to their rating category…

Moody’s rates over 8,000 local governments in the United States. Less than 1% of those with general obligation or equivalent ratings have been placed under review because of the new pension adjustments.

(Editor’s note: Italics added for emphasis)

Great. Chicago is in another “select group” it really doesn’t want to belong to these days.

You can read the entire announcement on the Moody’s website here.

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

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Illinois Bond Issue Halted Due To Credit Concerns

Today, residents of the state of Illinois saw the repercussions of having $8 billion of unpaid bills, a $96.8 billion pension funding gap, and falling credit ratings. Karen Pierog reported on the Reuters website:

Illinois yanked a $500 million general obligation bond issue slated for Wednesday because of credit concerns that could boost its borrowing costs, in the latest financial blow to the state, which has failed to fix its bloated public pensions.

Investment banks that planned to bid on the debt indicated investors would demand higher yields on the 25-year bonds, said John Sinsheimer, Illinois’ capital markets director.

“We were getting indications of higher spreads than we were anticipating,” said Sinsheimer, who declined to discuss specific spread levels. “We felt it was prudent to pull the deal for the time being.”

(Editor’s notes: Italics added for emphasis)

Pierog pointed out:

Illinois is already faced with the highest spreads – 137 basis points in the latest week – over Municipal Market Data’s benchmark triple-A scale among states and cities tracked by MMD, a unit of Thomson Reuters.

Over the weekend, I noted Standard & Poor’s downgraded the State of Illinois on Friday to an “A-” rating with a negative outlook- last among all 50 states. I added that among other major credit rating agencies, Moody’s also ranks Illinois last of all the U.S. states and Fitch ranks it 49th but on watch for a possible downgrade.

As for Illinois taxpayers? They may have to pay tens of millions of dollars more in interest when the state looks to borrow more money- like what almost happened today.

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

Source:

Pierog, Karen. “UPDATE 2-Illinois pulls $500 mln bond sale amid credit concerns.” Reuters. 30 Jan 2013. (http://www.reuters.com/article/2013/01/30/illinois-bonds-idUSL1N0AZ6TQ20130130). 30 Jan. 2013.

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