pension reform

Chicago Requires $754 Million In New Revenue, Cuts To Balance Books

For a couple of years now, regular readers of Survival And Prosperity have witnessed me blog about higher fees/fines/taxes and reduced government services as Chicago’s financial reckoning day draws closer.

I fear the pace of all this is about to pick up.

Hal Dardick reported on the Chicago Tribune website late Friday afternoon:

Mayor Rahm Emanuel must come up with at least $754 million in new revenue and budget cuts to balance the city’s books, according to preliminary 2016 budget estimates the administration released Friday.

A little less than half — $328 million — would cover increased payments to the police and fire pension funds that Emanuel and aldermen did not account for in this year’s budget. That number could be even higher if the mayor doesn’t get the pension relief he’s seeking from Springfield.

In addition, City Hall must figure out how to close a projected $426 million hole in next year’s budget, an annual financial analysis showed. The shortfall comes as Emanuel has been borrowing at high interest rates to keep the city afloat.

Unlike previous years, Emanuel is not taking a property tax increase off the table. At a news conference this week, the mayor would not rule out a politically unpopular property tax hike, saying he’ll wait to show his hand until September, when he rolls out “a full budget with all parts in there.”

(Editor’s note: Bold added for emphasis)

Chicago property owners are probably hoping for an endless summer- considering what could be in store for them next month.

A significant property tax hike in and of itself might not be enough to make Chicagoans think about moving out of the city. However, sustained pressure on household finances from all applicable fees, fines, and taxes could do it, particularly if government services (public safety comes to mind here) steadily erode.

You can read the entire piece on the Tribune website here (registration required).

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

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Moody’s Cuts Cook County Bond Rating, Outlook Negative

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 due to, in part, a statutory funding requirement that is not tied to the health of the County Employees’ and Officers’ Annuity and Benefit Fund of Cook County (the Fund), resulting in a growing disparity between the fund’s actuarially required contribution (ARC) and its actual employee and employer contributions. Additionally, approximately 50% of the county’s tax base includes the city of Chicago (GO rated A3/negative outlook), resulting in a significant overlapping long-term liability burden. These considerations are balanced by the county’s key credit strengths, including a large tax base that comprises the second most populous county in the nation, inclusive of numerous communities with strong demographic profiles; broad revenue raising flexibility inherent in the county’s home rule status; recent stabilization of financial operations across multiple funds; and a strong management team that continues to implement best practices across all lines of county business. Additionally, the A1 rating reflects the county’s demonstrated willingness to pursue pension reform.

The negative outlook reflects the formidable hurdles facing the county in its quest to pursue meaningful pension reform. Changes to the Fund, including employer contributions and benefits received by plan participants, must be enacted at the State of Illinois (GO rated A3/negative outlook) level. The General Assembly’s legislative paralysis to date with respect to enacting its own pension reforms may further delay the county’s attempt to present a reform package, despite having a significantly developed plan. Further, strong constitutional protections for pension benefits may result in a legal challenge that could further delay the implementation of reforms.

(Editor’s note: Italics added for emphasis)

According to Moody’s, Cook County now has “above-average creditworthiness relative to other US municipal or tax-exempt issuers or issues” as compared to “very strong creditworthiness” prior to the downgrade.

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

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

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Tuesday, August 20th, 2013 Bonds, Borrowing, Entitlements, Government, Retirement No Comments

Chicago Faces $339 Million Budget Deficit In 2014, $1 BILLION Gap In 2015

Last year on this day, I wrote the following about the City of Chicago’s just-released annual financial analysis:

The City of Chicago just released its annual financial analysis. Of no surprise to a number of Chicagoans, the city’s financial health is worrisome. According to an article by City Hall reporter Fran Spielman on the Chicago Sun-Times website last night:

• Chicago is looking at a budget shortfall of $369 million in 2013. Granted, this is better than the $741 million deficit forecast last year, and the Chicago news media is crediting Mayor Rahm Emanuel for this significant reduction…

By early October 2012, Mayor Rahm Emanuel had presented an $8.3 billion budget for 2013 to the Chicago City Council that aimed to balance the City’s finances without introducing new fees, fines, or taxes.

The latest financial analysis is out, and the budget gap in 2014 is projected to be $339 million. Still crappy, but a lot better than what could be in store for the “Windy City” by 2015. Hal Dardick reported on the Chicago Tribune website this morning:

The day of financial reckoning for Chicago is not far off, with the city budget shortfall expected to near a record $1 billion in 2015 if major changes are not made to the government worker pension systems, city officials said Wednesday.

That stark assessment, contained in the annual financial analysis prepared by Mayor Rahm Emanuel’s top budget officials, overshadowed the fact that the city needs to close an expected $339 million budget gap predicted for next year.

(Editor’s note: Italics added for emphasis)

So are Chicagoans going to get slammed with higher fees, fines, and taxes in the coming months? Fran Spielman reported on the Chicago Sun-Times website yesterday:

Mayor Rahm Emanuel will not raise sales or property taxes to close a $338.7 million gap in next year’s budget but all bets are off in 2015, when the shortfall balloons to $1 billion without pension reform, a top mayoral aide said Wednesday.

(Editor’s note: Italics added for emphasis)

Spielman noted that 2016 looks to be painful for the City as well. She added:

The deficit will rise to $994.7 million in 2015 and $1.15 billion in 2016 without a painful mix of employee concessions and new revenues, according to the city’s annual financial analysis released Wednesday.

(Editor’s note: Italics added for emphasis)

What was that Dardick wrote in his article’s introduction?

“The day of financial reckoning for Chicago is not far off…”

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

Sources:

Dardick, Hal. “Absent pension reform, city faces $1 billion hole.” Chicago Tribune. 1 Aug. 2013. (http://www.chicagotribune.com/news/local/ct-met-emanuel-budget-hole-0801-20130801,0,468987.story). 1 Aug. 2013.

Spielman, Fran. “City deficit to hit nearly $1 billion soon without pension reform.” Chicago Sun-Times. 31 July 2013. (http://www.suntimes.com/news/21642911-418/city-deficit-to-hit-nearly-1-billion-soon-without-pension-reform.html). 1 Aug. 2013.

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Civic Federation: Funding Continues To Decline For Chicago-Area Public Employee Pension Funds

The Chicago-based Civic Federation is out with a new report about the health of Chicago-area public employee pension funds. The independent, non-partisan government research organization that provides analysis and recommendations on government finance issues for the Chicago region and State of Illinois put out the following news release this morning:

Aggregate Unfunded Liability for Chicago-area Public Pension Funds Increased by $4.6 Billion in FY2011

(CHICAGO) A Civic Federation report released today examines the continued funding decline of Chicago-area public employee pension funds. Unfunded liabilities for the ten funds analyzed in the report increased to $32.0 billion in fiscal year 2011 from $27.4 billion in fiscal year 2010, an increase of 16.7% according to the most recent audited data available. For all pension funds supported by the taxes of Chicago residents, including statewide funds, the total unfunded liabilities reached $16,914 per Chicago resident in FY2011.

“Without comprehensive reforms, this staggering level of pension obligations will soon mean dramatic tax increases, significant service cuts or both for Chicago residents,” said Civic Federation President Laurence Msall. “Illinois and local lawmakers owe it to taxpayers and public employees to agree on reforms that will significantly reduce pension costs for our state and local governments and ensure that the funds remain solvent for current and future public employees.” In the report, the Federation urges local governments to develop pension reform frameworks suited to their own employee population, statutory provisions and funding levels. The report cites Cook County Commissioner Bridget Gainer’s OpenPensions.org site as an example of transparently advocating for changes tailored to the needs of the County’s pension fund.

Each of the ten funds analyzed in the report experienced sharp funding declines in the last decade. On average, the ten funds had an actuarial funding level of 50.8% in FY2011, down from 80.3% in FY2002. All ten funds are now funded below 65%, ranging from a low of 28.3% for the Fire Fund to a high of 64.9% for the Laborers’ Fund.

The declining health of Chicago-area public pension funds is due in large part to inadequate employer contributions over a sustained period and recent investment losses. All of the local funds analyzed received their statutorily required employer contributions in FY2011. However, the employer contribution level set by State statute was approximately $1.6 billion short of the $2.5 billion level necessary to cover current costs for the funds and reduce their unfunded liabilities over a 30-year timeframe.

Adequate funding levels are likely to be even more difficult to attain in the future because the funds have fewer employees to support a rising number of beneficiaries. In FY2011 the ten funds had 1.16 active employees for every beneficiary, down from 1.65 actives per beneficiary in FY2002. Six of the ten funds – the Police, Laborers’, MWRD, Forest Preserve, CTA and Park District Funds – had more beneficiaries than active employees in FY2011.

The Federation’s analysis reviews the FY2011 actuarial valuation reports and financial statements for the City of Chicago’s Police, Fire, Municipal and Laborers’ Funds, the Chicago Teachers’ Pension Fund and the pension funds of Cook County, Forest Preserve District of Cook County, Chicago Park District, Metropolitan Water Reclamation District and the Chicago Transit Authority. FY2011 data is the most recent audited data available for all ten funds.

The full 79-page report, available at www.civicfed.org, is intended to provide policymakers, pension trustees, pension fund members and taxpayers with the resources to make informed decisions regarding public employee retirement benefits.

(Editor’s note: Italics added for emphasis)

Even though I’ll be moving out of Chicago very soon, I’ll still be living in Cook County. As such, I won’t be surprised to get hit with more fees and taxes, in conjunction with less government services, as financial challenges grow at the county and state level.

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

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State Of Illinois Bankrupt By 2015?

While it’s “business as usual” for Illinois politicians, two influential groups grow increasingly-wary of the state’s financial situation. Paul Merrion reported on the Crain’s Chicago Business website back on April 22:

Most wealthy Chicago-area investors are optimistic about the global and national economic outlook, but many fear a downturn in the Illinois economy this year, a new survey finds.

The state’s financial well-being has 76 percent of local investors “very concerned,” while only 46 percent feel that way about the prospects for the U.S. economy, according to a survey by Morgan Stanley Smith Barney LLC. A bit more than half (52 percent) said the state’s pension crisis was their top concern, and 58 percent foresee that the Illinois economy will get worse by year-end.

Speaking of the state’s public pension crisis, a pro-Illinois taxpayer group is warning it has the potential to bankrupt the State of Illinois. John Cody reported on the CBS Chicago website Tuesday:

A conservative watchdog group is warning of dark days ahead for the entire state unless Illinois mends it’s financial ways, and soon.

Taxpayers United President Jim Tobin, is essentially blaming Democrats with a two house super-majority for failing to act on pension reform reform.

“Illinois will be the first state to go bankrupt, unless pension reforms are implemented,” said Tobin.

And Tobin’s numbers suggest it’ll be sooner rather than later.

“Yeah, 2015 is about right,” said Tobin.

And yet, state lawmakers continue to fiddle (waste time on more trivial issues) while Illinois burns.

My prediction? Illinois residents should prepare themselves for a combination of more fees, taxes, and belt-tightening from and by the State. Most likely, sooner rather than later.

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

Sources:

Merrion, Paul. “Rich Chicagoans fret about Illinois economy: survey.” Crain’s Chicago Business. 22 Apr. 2013. (http://www.chicagobusiness.com/article/20130422/NEWS02/130419726/rich-chicagoans-fret-about-illinois-economy-survey). 3 May 2013.

Cody, John. “Conservative Watch Dog: Pensions Could Bankrupt Illinois By 2015.” CBS Chicago. 30 Apr. 2013. (http://chicago.cbslocal.com/2013/04/30/conservative-watch-dog-pensions-could-bankrupt-illinois-by-2015/). 3 May 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

Illinois Treasurer: State $200 Billion In Debt

Illinois Treasurer Dan Rutherford recently calculated how much debt the state has accrued. $200 billion. This includes:

• $45 billion in bond debt
• $8 billion in unpaid bills
• $140 billion in unfunded pension and health care benefits for state employees

According to Rutherford’s calculations, each household in Illinois owes $42,000.

And despite this mountain of debt, some state politicians are still trying to borrow more money (increasing the debt) to pay off existing debt. Say what? From a Chicago Tribune editorial piece last night:

With all that debt squeezing spending on schools and other priorities, [Illinois Governor Pat] Quinn now wants legislators to, yes, authorize still more billions in borrowing to pay the state’s bills. Why? Because (a) Quinn cannot bring himself to propose a budget that would spend only what Illinois collects in revenues and (b) Quinn also cannot bring himself to campaign for the more economical pension system that Illinois desperately needs.

To that Rutherford, bless him, retorts:

“You can’t borrow any more money. If I need to send letters to the rating companies to tell them the treasurer of Illinois is opposed to more borrowing, I’m going to do that. If it means I have to get ahold of the bond houses to let them know that, ‘I agree with you, we are a major risk, and I am the finance officer of this state,’ I intend to do those kinds of things if that’s what it’s going to take to keep Illinois from going into further debt. …

“Borrowing is an addiction. … Illinois. Cannot. Borrow. Any. More. Money.”

That’s what Rutherford said Monday at a news conference. Legally, he can’t block long-term borrowing binges. His resolve, though, makes him stand out in Springfield. Many legislators of both parties are hoping to escape their spring session Tuesday without slashing state spending or reforming a pension system headed for implosion. Some of them instead would take the timid route and keep on borrowing billions.

Timidity. Oh great. That’s a trait much desired in those we send to represent us in government. And when did living within one’s means, and reform, become a fate worse than Hell? Apparently when political support is derived from entities that benefit from substantial state spending, as the Tribune has pointed out in the past. I have a pretty good idea that upstanding citizens still residing in the “Land of Lincoln” are disgusted over what’s going on. I know past supporters of “the machine” are even starting to come around. The other day I spoke to a relative who’s a die-hard Democrat, and who had nothing but nasty things to say about the state leadership in his own political party. Knowing the extent of his political partisanship, after hanging up the phone the only thing I could think was…

Hell hath frozen over.

But what should I have expected, living in a state more people are referring to as “Madiganistan” (referring to powerful Democratic House Speaker Michael Madigan).

I’m not going to delve into politics (this isn’t what this post is about)- so here’s the score. The state treasurer calculates Illinois’ debt is $200 billion. Despite no sweeping cuts or reform in state spending and operations (the state’s spending ceiling in each of the next four budget years is $36.8 billion in the 2012 budget year, $37.5 billion in 2013, $38.3 billion in 2014 and $39 billion in 2015), personal income taxes were hiked 67 percent and corporate income taxes were hiked 46 percent earlier this year. However, Illinois Comptroller Judy Baar Topinka reported back on April 27 that the state will still end the budget year $8 billion “in the red.” Governor Quinn is on the record for saying he doesn’t believe in radical cuts in government spending. And according to that Tribune editorial piece from last night, state legislators from both parties are hoping to end the spring session next Tuesday without having to make significant cuts in spending or reforming the pension system. Some politicians, including Governor Quinn, even want to keep borrowing billions (thereby going into more debt) to pay back a portion of the state’s existing debt.

So, even if these billions of dollars are borrowed, it looks to me as if the writing’s on the wall. Illinois residents will almost certainly see significant cutbacks in government spending- along with higher taxes and fees- in the coming months and years. It’s hard to envision any other way of paying back this debt- as the system currently stands.

Like that saying goes… “You can pay me now, or you can pay me later.”

Source:

“Your share: $42,000.” Chicago Tribune. 25 May 2011. (http://www.chicagotribune.com/news/opinion/editorials/ct-edit-legis-20110525,0,6020211.story?obref=obnetwork). 26 May 2011.

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Survival And Prosperity
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Christopher E. Hill, Editor

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