Moody’s Investors Service

$500 Million Chicago Public Schools Budget Shortfall Could Mean More Taxpayer Pain

Yesterday I spotted the following on the Chicago Tribune website concerning the budget gap last year for Chicago Public Schools. Juan Perez, Jr., reported Friday:

Chicago Public Schools faced a shortfall in its operations budget of roughly $500 million at the close of its past fiscal year, leaving the financially troubled district with a significant bill to cover even as it struggles to balance this year’s spending plan.

The budget shortfall was reported in a recently issued financial postmortem for 2016 that also repeated a long-held conclusion: CPS either needs an infusion of new money or will have to make major cuts if it is to keep operating as it has been.

CPS has faced budget gaps for years, but has been able to cover them partly by dipping into cash reserves and tapping costly lines of short-term credit for cash to pay the bills. Those strategies are beginning to reach their limit, district officials acknowledge

(Editor’s note: Bold added for emphasis)

While reading the article I thought, “Where’s the mention of potential new/higher taxes on Chicagoans?” Sure enough, I spotted the following further down the piece:

There’s also expectations from some observers that the city will again turn to its taxpayers for revenue…

(Editor’s note: Bold added for emphasis)

On January 12, the Global Credit Research division over at Moody’s Investors Service suggested:

CPS could consider more difficult options to address its finances should the State of Illinois (Baa2 negative) be unable or unwilling to provide additional relief: levy for debt service on GO alternate revenue bonds, stop making employer pension contributions, or seek state authorization to file for Chapter 9 bankruptcy.

(Editor’s note: Bold added for emphasis)

Stay tuned, Chicago. In the meantime, check out the entire article on the Tribune website here.

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

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Monday, February 6th, 2017 Bankruptcy, Education, Government, Taxes Comments Off on $500 Million Chicago Public Schools Budget Shortfall Could Mean More Taxpayer Pain

Moody’s On Chicago Public Schools Crisis: Consider Tax Levy, Pension Contribution Stoppage, Or Bankruptcy

“Chicago and New York rank at the bottom of a new analysis of fiscal strength based primarily on data from 2015 financial reports issued by the cities themselves. The analysis includes 116 U.S. cities with populations greater than 200,000.

Chicago’s position at the bottom of the ranking is no surprise to anyone who follows municipal finance. The Windy City has become a poster child for financial mismanagement, having suffered a series of ratings downgrades in recent years. Aside from having thin reserves and large volumes of outstanding debt, Chicago is notorious for its underfunded pension plans…”

The Fiscal Times, January 9, 2107

Moody’s Investors Service recently weighed in on Chicago’s well-publicized financial crisis. Last Thursday its Global Credit Research division published the following on the Moody’s website:

While unfunded pension liabilities will continue weighing on the City of Chicago’s (Ba1 negative) credit profile, plans to significantly increase contributions with higher taxes is a favorable departure from prior funding practices. However, the liquidity crisis at Chicago Public Schools (CPS — B3 negative) is worsening amid a continued budget impasse at the state level, Moody’s Investors Service says in two new research reports released today…

In “City of Chicago: Frequently Asked Questions,” Moody’s says despite the city’s expanding economy, revenue growth, and healthy liquidity, its pension burden is likely to remain among the highest of any rated, major local government for many years.

“While Chicago’s recent tax increases will provide revenue to significantly increase pension funding, the city’s unfunded pension liabilities exceed seven times its revenue and are projected to grow for at least 15 more years,” says Matt Butler, Vice President of Moody’s…

(Editor’s note: Bold added for emphasis)

The well-known credit rating agency added this about the city’s public school system:

In a separate report, “Chicago Public Schools: Frequently Asked Questions,” Moody’s states CPS’ fiscal pressures are intensifying due to depletion of reserves following years of imbalanced operations, unrealistic budget assumptions, and escalating pension costs…

Moody’s says CPS could consider more difficult options to address its finances should the State of Illinois (Baa2 negative) be unable or unwilling to provide additional relief: levy for debt service on GO alternate revenue bonds, stop making employer pension contributions, or seek state authorization to file for Chapter 9 bankruptcy…

(Editor’s note: Bold added for emphasis)

MarketWatch news editor Rachel Koning Beals expanded on Moody’s suggestions for dealing with the CPS situation. She wrote Saturday:

Moody’s has a revised shortlist of painful fixes for the public school system in Chicago.

One idea is to approve another increasingly politically unpopular property-tax levy to pay off debt, as the nation’s third-largest school district just issued another batch of high-interest bonds.

The second idea from the credit-ratings agency is to skip a pension payment to the Chicago Teachers’ Pension Fund, which would come just months after the district and its teacher‘s union hammered out an 11th-hour contract to avoid a second labor strike in a span of four years.

And last resort? Just declare bankruptcy already

(Editor’s note: Bold added for emphasis)

Who’s the say the City will act on any of these suggestions (at least, right away)? That being said, Chicago taxpayers and CPS employees/retirees might want to take heed of all this.

Head on over to the Moody’s Investors Service website here to read the entire release from the Global Credit Research division. It ain’t pretty.

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

Source:

Koning Beals, Rachel. “Maybe Chicago schools should declare bankruptcy and get it over with, says Moody’s.” MarketWatch. 14 Jan. 2017. (http://www.marketwatch.com/story/maybe-chicago-schools-should-declare-bankruptcy-and-get-it-over-with-says-moodys-2017-01-13). 16 Jan. 2017.

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Monday, January 16th, 2017 Bankruptcy, Bonds, Debt Crisis, Education, Entitlements, Fiscal Policy, Government, Taxes Comments Off on Moody’s On Chicago Public Schools Crisis: Consider Tax Levy, Pension Contribution Stoppage, Or Bankruptcy

Chicago Warned By Moody’s About Pension Liabilities

In early April, Standard & Poor’s warned the City of Chicago:

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.

Now Moody’s has fired a shot across the city’s bow in 2015. From their Global Credit Research unit on Friday:

Chicago’s (Baa2 negative) pension plans face an uncertain future. Statutes that govern the city’s pension funding requirements have come under legal and political fire, particularly during the last year, as pensioners, politicians, taxpayers and investors have questioned the laws’ constitutionality and affordability, Moody’s Investors Service says in a new report.

Regardless of the ultimate answers, one outcome is certain: Chicago’s unfunded pension liabilities and ongoing pension costs will grow significantly, forcing city officials to make difficult decisions for years to come.

If current laws stand, Chicago’s annual pension contributions are projected to increase by 135% in 2016; by an average annual rate of 8% in 2017-21; and by an average annual rate of 3% in 2022-26.

The 2016 increase alone equals a significant 15% of the city’s 2013 operating revenue, Moody’s says in “Chicago’s Pension Forecast — Tough Choices Now or Tougher Choices Later.”

(Editor’s note: Bold added for emphasis)

“Touch Choices Now or Tougher Choices Later.” That pretty much sums up the situation not only in the “Windy City,” but in the state of Illinois as well.

Blame Emanuel? Blame Rauner? Whatever. As is if these guys have been around long enough to help put Chicagoans and Illinoisans in their respective financial messes.

You can read the rest of the Moody’s news release on their website here.

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

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Sunday, May 3rd, 2015 Credit, Debt Crisis, Entitlements, Government Comments Off on Chicago Warned By Moody’s About Pension Liabilities

Moody’s Analytics: All U.S. States Except Delaware Have Escaped Recession Risk

Just when I thought I had read/seen it all today comes this from Lisa Lambert on the Reuters website late this afternoon:

All U.S. states except for Delaware have escaped the possibility of falling back into recession, as they reap the rewards of strong private-sector employment and a burgeoning energy sector, according to an analysis released on Tuesday.

Moody’s Analytics, which tracks state and metropolitan economies, added Illinois, Wisconsin and Alabama to its list of states in recovery. That left Delaware alone in its “at risk of recession” category.

Moody’s Analytics, a unit of Moody’s evaluates economics and financial risk around the world. A separate unit, the credit ratings agency Moody’s Investors Service, recently said the outlook for states is now stable, after five years of being negative.

With the U.S. economy being kept afloat by massive federal government intervention, trillion dollar budget deficits, an almost zero percent federal funds rate, attempted reinflating of the housing and financial markets, $85 billion worth of long-term bonds being purchased by the Fed each and every month, job creation dominated by part-time positions, and highly-questionable government reporting of economic data to boot, one could easily argue another recession- measured using “official” figures- is a real and constant threat to the United States.

After I read that recession assessment by Moody’s Analytics, the following sarcastic line from “Gunny” Highway (actor Clint Eastwood) in the 1986 film Heartbreak Ridge came to mind:

Well, I’ll sleep a lot better at night knowing that sir.

Have a good evening everyone.

Source:

Lambert, Lisa. “Recession risk gone in all U.S. states but 1: Moody’s Analytics.” Reuters. 10 Sep. 2013. (http://www.reuters.com/article/2013/09/10/us-usa-states-economies-idUSBRE9891BG20130910). 10 Sep. 2013.

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Tuesday, September 10th, 2013 Bailouts, Bonds, Borrowing, Deficits, Employment, Energy, Federal Reserve, Fiscal Policy, Government, Housing, Interest Rates, Monetary Policy, Recession, Recovery, Spending, Stimulus Comments Off on Moody’s Analytics: All U.S. States Except Delaware Have Escaped Recession Risk

Moody’s Revises Illinois’ Credit Rating Outlook To Negative

Moody’s Investors Service, a major Wall Street credit rating agency, announced yesterday that it has revised its rating outlook for the State of Illinois from stable to negative. Illinois is already Moody’s lowest-rated state. From the agency’s website Thursday:

Rating Action: Moody’s revises State of Illinois’ rating outlook to negative from stable; general obligation rating affirmed at A2

Global Credit Research – 13 Dec 2012

Action applies to approximately $33 billion of outstanding general obligation and related debt

New York, December 13, 2012 — Moody’s Investors Service has revised the State of Illinois’ credit outlook to negative from stable, while affirming the state’s general obligation debt rating at A2. The state has about $28 billion of G.O. bonds outstanding. We have also affirmed related ratings assigned to state borrowings, including about $2.6 billion of debt issued by the Metropolitan Pier & Exposition Authority, rated A3, and the state’s Build Illinois sales tax revenue bonds, rated A2, of which $2.7 billion are currently outstanding. The negative outlook is linked to ratings on the G.O. as well as the related credits.

SUMMARY RATING RATIONALE

The negative outlook reflects our view that the state’s pension funding pressures are likely to persist and perhaps worsen in the near term. Moreover, fiscal 2014 marks the last year before Illinois’ 2011 income tax increases are partly unwound, putting the state on track to deal with simultaneous growth in pension funding needs and loss of revenue. If the legislature in coming weeks or months enacts significant pension reforms, they are almost certain to be challenged, given the state’s constitutional protection of retiree benefits. Political pressures, coupled with the threat of litigation, may mean that any reforms enacted have only a marginal effect on liabilities. Despite a diverse economy with above-average wealth, lackluster demographic and economic characteristics indicate that, even with continued US economic improvement, the state’s existing tax structure will not provide enough revenue to address the rising cost of pension benefits and other state expenses. In addition, the state’s payment backlog remains high.

(Editor’s note: Italics added for emphasis)

Back on January 13, 2011, Illinois Governor Pat Quinn signed legislation authorizing a 67 percent increase in the personal income tax of Illinois residents and a 46 percent increase in corporate income taxes on Illinois businesses. In 2015, these taxes are scheduled to be rolled back from 5 percent to 3.75 percent and 7 percent to 5.25 percent respectively. However, as I noted that same day:

The last time income tax rates in the “Land of Lincoln” went up in 1989, politicians also claimed it was as a temporary increase to combat a financial “rough patch.” But the rates never came down and by 1993 were designated permanent. Until now, that is.

I won’t be surprised if lighting strikes Illinois residents and businesses twice.

You can read the entire rating action report on the Moody’s website here.

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Friday, December 14th, 2012 Bonds, Credit, Debt Crisis, Entitlements, Government, Taxes Comments Off on Moody’s Revises Illinois’ Credit Rating Outlook To Negative

Michigan Lawmaker: ‘We’re Going To Have To Seriously Consider Dissolving The City Of Detroit’

As I’ve said before, once in a while I hear chatter about Chicago being on the path to becoming the next Detroit. Not the hub of America’s auto industry that “old” Detroit once was, but rather “this” Detroit:


“Scary Movie 4 – Detroit: Before & After the Attack”
YouTube Video

I guess conditions in the “Motor City” are getting so bad one Michigan state senator has gone so far as to say the legislature is going to have to “seriously consider dissolving” the city. From The Detroit News website this morning:

State Sen. Rick Jones has a solution for fixing Detroit’s ongoing political and financial problems: Get rid of the city.

“At some point we’re going to have to seriously consider dissolving the City of Detroit,” Jones told Insider.

You read that right.

Jones, R-Grand Ledge, is proposing the Legislature, which has the power to establish municipalities, should make the city part of unincorporated Wayne County.

Jones was unclear about what good it would to do to turn the city and its services for 700,000 residents over to a county with it’s owns financial and political problems.

But he said outstate lawmakers like himself are growing tired of the City Council delaying implementation of the financial consent agreement state and city leaders signed in April, inching perilously closer to payless paydays and bankruptcy.

(Editor’s note: Italics added for emphasis)

Detroit’s finances appear pretty bleak. According to Reuters last night, not only did Moody’s Investors Service lower the city’s debt ratings deeper in the junk category Wednesday, but:

Moody’s also placed a negative outlook on the lowered ratings, citing in part “the rising possibility that the city could file for bankruptcy or default on an obligation over the next 12 to 24 months.”

(Editor’s note: Italics added for emphasis)

Here’s hoping Detroit can find a way out of their serious financial and political mess.

And that chatter about Chicago becoming the next Detroit doesn’t pan out.

Sources:

“Political insider: Senator says to dissolve Detroit if it can’t fix its problems.” The Detroit News. 29 Nov. 2012. (http://www.detroitnews.com/article/20121129/POLITICS02/211290357/Political-insider?odyssey=mod|newswell|text|FRONTPAGE|s). 29 Nov. 2012.

“Moody’s cuts Detroit debt ratings deeper into junk.” Reuters. 28 Nov. 2012. (http://www.reuters.com/article/2012/11/28/detroit-moodys-downgrade-idUSL1E8MSDCJ20121128). 29 Nov. 2012.

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Thursday, November 29th, 2012 Bankruptcy, Bonds, Credit, Defaults, Fiscal Policy, Government Comments Off on Michigan Lawmaker: ‘We’re Going To Have To Seriously Consider Dissolving The City Of Detroit’
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