Moody’s

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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Chicago Public Pension Crisis Latest

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

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

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

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

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

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

(Editor’s note: Bold added for emphasis)

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

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

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

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

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

(Editor’s note: Bold added for emphasis)

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

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

(Editor’s note: Bold added for emphasis)

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

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

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

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

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

(Editor’s note: Bold added for emphasis)

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

That goes for those large Illinois communities as well.

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

And the inevitable “blowback” down the road.

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

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

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

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

(Editor’s note: Bold added for emphasis)

Sources:

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

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

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

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

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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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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

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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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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S&P Downgrades Illinois Credit Rating To Worst In Nation

When I heard a major credit rating agency had downgraded Illinois Friday, the term “death spiral state” quickly came to mind.

And then my thoughts turned to the tens of millions of dollars Illinois taxpayers might be on the hook for down the road.

Ray Long and Monique Garcia reported on the Chicago Tribune website Friday:

Illinois fell to the bottom of all 50 states in the rankings of a major credit ratings agency Friday following the failure of Gov. Pat Quinn and lawmakers to fix the state’s hemorrhaging pension system during this month’s lame-duck session.

Standard & Poor’s Ratings Service downgraded Illinois in what is the latest fallout over the $96.8 billion debt to five state pension systems. The New York rating firm’s ranking signaled taxpayers may pay tens of millions of dollars more in interest when the state borrows money for roads and other projects.

(Editor’s note: Italics added for emphasis)

Illinois now has an “A-” rating with a negative outlook from S&P. Among other major credit rating agencies, Moody’s ranks Illinois last among the 50 states and Fitch ranks it 49th but on watch for a possible downgrade.

Regarding the state’s huge pension funding gap, Mark Peters wrote on the Wall Street Journal website Friday:

S&P estimates the pension system in the coming year will see assets fall to 39% of future obligations.

(Editor’s note: Italics added for emphasis)

Hardly any talk about the crisis in the local mainstream media outlets this weekend. Amazing. I can’t understand why more Illinois residents aren’t up in arms over this humongous financial mess the state is in.

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

Sources:

Garcia, Monique and Long, Ray. “Illinois credit rating sinks to worst in nation.” Chicago Tribune. 25 Jan. 2013. (http://articles.chicagotribune.com/2013-01-25/news/chi-illinois-credit-rating-sinks-to-worst-in-nation-20130125_1_action-on-pension-reform-robin-prunty-illinois-credit). 27 Jan. 2013.

Peters, Mark. “S&P Cuts Illinois Credit Rating.” Wall Street Journal. 25 Jan. 2013. (http://online.wsj.com/article/SB10001424127887324539304578264293106044944.html). 27 Jan. 2013.

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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 No Comments

Is Illinois Greece?

If California is Greece, then Illinois is Spain.

-Panelist at June’s “State of the Nonprofit” conference in Chicago (hat tip The Greater Good blog)

The proverbial brick wall keeps getting closer in Illinois. And even though the state’s financial woes- and what needs to be done to fix them- are painfully obvious, the politicians carry on as if it were business as usual.

The problem is, it’s not. And years of fiscal mismanagement are really starting to bite the “Land of Lincoln” in its rear-end.

Take the state’s credit ratings, for example. From Karen Pierog on the Chicago Tribune website yesterday:

Illinois lawmakers’ inability to reform a woefully underfunded public retirement system at a special session last Friday is likely to weigh on the state’s already relatively low credit ratings.

“We are in the process of reviewing the total credit picture, including the budget, pensions, etc,” Standard & Poor’s Ratings Services analyst Robin Prunty said on Tuesday.

“But certainly, the lack of action on pensions is not a credit positive.”

Pierog, who is affiliated with Reuters, added:

S&P, which rates Illinois A-plus with a negative outlook, put the state on notice in March that it could face a multiple-notch general obligation rating downgrade if there is no “credible progress” in taming its huge $83 billion unfunded pension liability and on tackling a structural budget imbalance.

Another credit rating agency, Moody’s Investors Service, downgraded the State of Illinois to A2 from A1 earlier this year.

According to the California State Treasurer’s website this morning, California’s S&P and Moody’s credit ratings are A- (lower than Illinois) and A1 (higher than Illinois), respectively.

But it’s not just credit ratings where years of poor policymaking are coming back to haunt the state. Pierog noted:

Investors are demanding higher yields to invest in Illinois’ bonds as its so-called credit spread over Municipal Market Data’s benchmark triple-A scale for 10-year debt is the widest at 157 basis points among major U.S. city and state debt issuers tracked by MMD, a unit of Thomson Reuters. California’s spread by comparison is less than half of Illinois’ at 66 basis points.

Perhaps that panelist got it wrong. California could be Spain, and Illinois, Greece.

Source:

Pierog, Karen. “Illinois’ inaction on pensions in rating agency crosshairs.” Chicago Tribune. 21 Aug. 2012. (http://www.chicagotribune.com/news/sns-rt-us-illinois-pension-ratingbre87k0uj-20120821,0,6367324.story). 22 Aug. 2012.

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Moody’s Says Greece Default ‘Virtually 100%’

While Jim Rogers and I don’t anticipate an authentic U.S. default in the coming days, one European nation is heading in that direction. From Moody’s Investors Service yesterday:

Moody’s Investors Service has today downgraded Greece’s local- and foreign-currency bond ratings to Ca from Caa1 and has assigned a developing outlook to the ratings.

The combination of the announced EU support programme and debt exchange proposals by major financial institutions implies that private creditors will incur substantial economic losses on their holdings of government debt. The rating’s developing outlook reflects the current uncertainty about the exact market value of the securities creditors will receive in the exchange. After the debt exchanges have been completed, Moody’s will re-assess the credit risk profile of any outstanding or new securities issued by the Greek government.

The announced EU programme along with the Institute of International Finance’s (IIF’s) statement (representing major financial institutions) implies that the probability of a distressed exchange, and hence a default, on Greek government bonds is virtually 100%. The magnitude of investor losses will be determined by the difference between the face value of the debt exchanged and the market value of the debt received. The IIF has indicated that investor losses are likely to be in excess of 20%.

(Editor’s note: Italics added for emphasis)

According to Moody’s Global Credit Research unit, all is not lost in Greece. They noted:

Looking further ahead, the EU programme and proposed debt exchanges will increase the likelihood that Greece will be able to stabilize and eventually reduce its overall debt burden. The support package for Greece also benefits all euro area sovereigns by containing the severe near-term contagion risk that would likely have followed a disorderly payment default or large haircut on existing Greek debt. However, Greece will still face medium-term solvency challenges: its stock of debt will still be well in excess of 100% of GDP for many years and it will still face very significant implementation risks to fiscal and economic reform.

(Editor’s note: Italics added for emphasis)

I blogged about the potential consequences for the United States should Greece default back on June 2 and July 6.

You can read Moody’s entire explanation for their downgrade of Greek debt on their website here.

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Tuesday, July 26th, 2011 Bonds, Credit, Debt Crisis, Defaults, Europe, Government No Comments

Moody’s Warns Of U.S. Rating Downgrade If No Progress Made On Increasing Statutory Debt Limit In Coming Weeks

I happened to be pulling into a supermarket parking lot this evening when I heard the following on the radio. From the Moody’s Investors Service website tonight:

Announcement: Moody’s Updates on Rating Implications of US Debt Limit, Long-Term Budget Negotiations

New York, June 02, 2011 — Moody’s Investors Service said today that if there is no progress on increasing the statutory debt limit in coming weeks, it expects to place the US government’s rating under review for possible downgrade, due to the very small but rising risk of a short-lived default. If the debt limit is raised and default avoided, the Aaa rating will be maintained. However, the rating outlook will depend on the outcome of negotiations on deficit reduction. A credible agreement on substantial deficit reduction would support a continued stable outlook; lack of such an agreement could prompt Moody’s to change its outlook to negative on the Aaa rating…

(Editor’s note: Italics added for emphasis)

The entire announcement can be viewed on Moody’s website here.

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Thursday, June 2nd, 2011 Bonds, Debt Crisis, Defaults, Government No Comments

What Would A Greece Debt Default Mean For The United States?

As much as Europe would like to, it can’t seem to shake the ongoing sovereign debt crisis. In recent weeks, a lot of attention has focused on Portugal. Now, it’s shifting back to Greece. And just because the United States is across the pond from Europe, it may not be immune from the repercussions of a Greek debt default should it get to that point. From Maria Petrakis on Bloomberg.com this morning:

Greece’s local and foreign currency bond ratings were cut to Caa1 from B1 by Moody’s Investors Service, which cited a growing risk that the country will default on its debt.

Moody’s said the outlook on Greek debt is negative, meaning that the rating could be reduced further. The rating is seven steps below investment grade and puts Greece below Montenegro as the lowest-ranked European nation.

“Greece is increasingly likely to fail to stabilize its debt ratios within the timeframe set by previously announced fiscal consolidation plans,” Moody’s said today in a statement. The country is also unlikely to meet its previously announced budget targets for 2011, it said.

European officials readying Greece’s second bailout in two years are preparing to ask investors to reinvest in new debt when existing bonds mature, overcoming central bankers’ objections to any restructuring. European leaders are trying to prevent the euro area’s first sovereign default after last year’s 110 billion-euro ($158 billion) rescue failed to prevent an investor exodus from Greece.

(Editor’s note: Italics added for emphasis)

Newsmax.com’s Forrest Jones pointed on May 29th that serious concerns exist over what a Greek default may mean for the United States:

Any default in Greece would pummel not only the economy there but spread across Europe and eventually to the United States, inflicting economic damage similar in speed to the subprime housing crisis from just a few years ago, says financial expert and author John Mauldin.

The problem, Mauldin tells Yahoo! Daily Ticker, is that banks all across Europe are exposed to Greece.

Should Greece default on its debt, the country would likely convert back to the drachma.

Immediately, all bank depositors would default on their debts due to the sudden weakening of their currency.

French and German banks would then write down their Greek exposure, and so would the European Central Bank (ECB).

On top of that, U.S. banks have been taking on risk in Europe via writing credit default swaps, instruments made famous during the U.S. housing meltdown that are basically insurance policies against defaults.

The result: everyone takes a hit.

Mauldin went on to add:

I’m worried that this one has a lot of contagion and it will infect the world.

(Editor’s note: Italics added for emphasis)

The sovereign debt crisis doesn’t seem to be going away any time soon. Stay tuned…

Sources:

Petrakis, Maria. “Greek Debt Rating Is Cut to Caa1 From B1 by Moody’s.” Bloomberg.com. 2 June 2011. (http://www.bloomberg.com/news/2011-06-01/greece-cut-to-caa1-from-b1-by-moody-s-outlook-negative.html). 2 June 2011.

Jones, Forrest. “John Mauldin: Greek Default Would Threaten US.” Newsmax.com. 29 May 2011. (http://www.newsmax.com/Newsfront/Greece-Economy/2011/05/29/id/398142). 2 June 2011.

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Thursday, June 2nd, 2011 Bailouts, Banking, Bonds, Debt Crisis, Defaults, Europe No Comments

Moody’s, Standard & Poor’s Warn About U.S. Credit Rating

Currently, Moody’s and Standard & Poor’s give the United States the highest possible credit rating. But that could change if America’s financial health continues to deteriorate. From the Wall Street Journal’s Nathalie Boschat, Mark Brown, and Mark Gongloff on January 14:

With attention focused on sovereign-debt worries in Europe, two major credit-rating firms reminded investors again that the U.S. has debt problems of its own…

Moody’s Investors Service said in a report on Thursday that the U.S. will need to reverse the expansion of its debt if it hopes to keep its “Aaa” rating.

“We have become increasingly clear about the fact that if there are not offsetting measures to reverse the deterioration in negative fundamentals in the U.S., the likelihood of a negative outlook over the next two years will increase,” Sarah Carlson, senior analyst at Moody’s, said.

Separately, Carol Sirou, head of Standard & Poor’s France, told a Paris conference on Thursday that the firm couldn’t rule out lowering the outlook for the U.S. rating in the future.

“The view of markets is that the U.S. will continue to benefit from the exorbitant privilege linked to the U.S. dollar” to fund its deficits, Ms. Sirou said. “But that may change.”

U.S. government debt has surged to an all-time high, topping $14 trillion, or $45,300 owed by each American.

Source:

Boschat, Nathalie, Brown, Mark, and Gongloff, Mark. “S&P, Moody’s Warn On U.S. Credit Rating.” Wall Street Journal. 14 Jan. 2011. (http://online.wsj.com/article/SB10001424052748703583404576079311379009904.html?mod=WSJ_WSJ_News_BlogsModule). 17 Jan. 2011.

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Tuesday, January 18th, 2011 Debt Crisis, Government 1 Comment


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