http://www.reuters.com/article/2015/02/27/us-usa-chicago-swaps-idUSKBN0LV26020150227
Much like Greece, Chicago has an unsustainable math problem with their operational model. In this case, Chicago can't afford those fabulous union pensions.
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Chicago drew closer to a fiscal free fall on Friday with a rating downgrade from Moody's Investors Service that could trigger the immediate termination of four interest-rate swap agreements, costing the city about $58 million and raising the prospect of more broken swaps contracts.
The downgrade to Baa2, just two steps above junk, and a warning the rating could fall further still, means the third-biggest U.S. city could face even higher costs in the future if banks choose to terminate other interest-rate hedges against fluctuations in interest rates. All told, Chicago holds swaps contracts covering $2.67 billion in debt, according to a disclosure late last year.
"This is an unfortunate wake-up call for anyone still asleep over the fiscal cliff facing the city of Chicago," said Laurence Msall, president of the Chicago-based government finance watchdog, The Civic Federation.
Chicago's finances are already sagging under an unfunded pension liability Moody's has pegged at $32 billion and that is equal to eight times the city's operating revenue. The city has a $300 million structural deficit in its $3.53 billion operating budget and is required by an Illinois law to boost the 2016 contribution to its police and fire pension funds by $550 million.
Cost-saving reforms for the city's other two pension funds, which face insolvency in a matter of years, are being challenged in court by labor unions and retirees.
State funding due Chicago would drop by $210 million between July 1 and the end of 2016 under a plan proposed by Illinois Governor Bruce Rauner.
Given all the financial pressures, both Moody's and Standard & Poor's, which affirmed the city's A-plus rating, warned on Friday that Chicago's credit ratings have room to sink.
Moody's said Chicago's rating could be cut if Illinois courts find pension reform laws enacted to shore up the state's financially ailing pension system and for two of Chicago's retirement systems are unconstitutional. A ruling by the Illinois Supreme Court on one of the laws could come as early as this spring.
S&P warned of a multi-notch downgrade if the city fails to come up with a sustainable plan this year to pay its escalating pension contributions.
In a report, Moody's noted that the downgrade to Baa2 moves the city closer to termination of 11 more swaps deals. Termination on those contracts would potentially cost Chicago an additional $133 million, Moody's noted.
Chicago has the financial resources at hand to cover the initial $58 million termination payments on the four swaps if the city is unable to renegotiate terms, Moody's said.
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Illinois Governor Proposes Bankruptcy for Chicago Public School System
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Three years ago Tuesday, the Illinois Supreme Court struck down the state's attempt to cut its employees' pension benefits to chip away at a retirement-system debt that's swelled to almost $11,000 for every man, woman and child.
Since then, Illinois's credit rating was downgraded to the verge of junk, its bonds have tumbled and its largest city, Chicago, was stripped of its investment-grade status by Moody's Investors Service. And Gov. Bruce Rauner, R, and the Democrat-led legislature have made no real progress toward a new plan that doesn't violate the state constitution's ban on reducing benefits.
"Illinois failure to address its pension crisis has resulted in further deterioration of the state and cities' financial condition, exorbitantly high borrowing costs, and an inability to address other critical needs at the state and local level," said Laurence Msall, president of the Civic Federation, a Chicago nonprofit that tracks state and municipal finances. "Time is not your friend when your liabilities are compounding and your revenues are not."
The funding shortfall across Illinois's five retirement systems climbed to $137 billion by last June, a jump of about $17.8 billion since 2015, after the government for years failed to made adequate contributions. That pension deficit -- more than four times larger that its debt to general-obligation bondholders -- is adding hundreds of millions of dollars in costs to Illinois's budget each year as the government plows more money in to catch up.
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Even as the state is set to pay $8.5 billion to the five retirement systems in 2019, it's still not enough. Unfunded liabilities keep growing. And the 2019 contribution is more than three times the state's payment a decade earlier: Illinois paid $2.8 billion to pensions in 2009. By 2045, the projected contribution will be $19.6 billion, according to a March report, based on actuarial valuations.
Illinois has actually made the problem worse since its highest court's ruling in 2015. In the past, if a pension fund's assumed rate of investment return got lowered, the state would step up its contribution. But last year lawmakers approved so-called smoothing, allowing the state to phase in hundreds of millions of dollars of those increased contributions. It helped the state ease its budget shortfall temporarily but will be costly over the longer term.
The longer the state doesn't address the pension crisis, the closer Illinois gets to taxes that are overly burdensome, to credit downgrades, to not paying pensions or even bond defaults, said Richard Ciccarone, president of Merritt Research Services.
... The state cannot grow its way out of this problem, Martwick said.
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An audible gasp went out in the breakout room I was in at last month’s pension event cosponsored by The Civic Federation and the Federal Reserve Bank of Chicago. That was when a speaker from the Chicago Fed proposed levying, across the state and in addition to current property taxes, a special property assessment they estimate would be about 1% of actual property value each year for 30 years.
Evidently, that wasn’t reality-shock enough. This week the Chicago Fed published that proposal formally. It’s linked here.
It surely ranks among the most blatantly inhumane and foolish ideas we’ve seen yet.
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Quite how it goes if / when Gov caves in on one will be interesting ....
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Since the math is inescapable, I predict that Illinois will at some point amend their constitution to allow a reduction in benefits and the unions will howl as they gut the system.
Mayor Rahm Emanuel on Wednesday delivered his proposals for improving Chicago’s public pension system, which is only 26 percent funded. Emanuel diverted from Democratic Party orthodoxy by calling for an amendment to the Illinois Constitution that would allow easing a rigid clause stating that public pension benefits “shall not be diminished or impaired.” ...
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Who knows, maybe they will embrace legalizing new industries (drugs/marijuana, gambling) in a big way to try and raise revenues. :flail:
Chicago’s outgoing Democrat mayor, Rahm Emanuel, says the way to defuse the Windy City’s pension bomb is to legalize and tax marijuana and build a city-owned casino.
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As of the 2017 City of Chicago Actuarial Report, each Chicagoan would have to pony up $140,000 to make pensions solvent.
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I have a far simpler approach that is 100% certain to work, and work faster.
- Illinois can allow municipal bankruptcies
- The Federal government can pass national legislation allowing municipal and even state bankruptcies
Q. How does that fix the problem?
A. As we have seen in Detroit, Michigan; Central Falls, Rhode Island; and numerous cities in California, pension promises are not sacrosanct in bankruptcy.
As it stands, states can allow or prohibit municipal bankruptcies, but if allowed, Federal laws take precedence over state rules. In bankruptcy, pension obligations can be reduced. They were hammered in Central Falls.
In Illinois, I would expect the City of Rockford to file bankruptcy the moment it could. Rockford is Illinois' third largest city.
Such a bankruptcy would send shock waves through the bond markets, but also where reform is needed most: Illinois pension plans.
Bankruptcy reform would put huge pressure on unions to reduce demands in a fair manner (highest pensioners get the biggest cuts), rather than leaving matters to the courts to decide where the cuts happen.
Bankruptcy reform would in and of itself likely ensure that the state would get around to fixing, via constitutional amendments, its other pension problems.
The advantage of my approach is we would not have to wait for a constitutional amendment. It would come later.
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Court records show that proprietors of Polekatz Gentlemen's Club, a strip club in Bridgeview, Illinois, a suburb of Chicago, are suing Cook County, alleging its revenue department is illegally demanding $1.7 million for lap dances under its “amusement tax.” That figure includes interest and penalties, according to The Cook County Record.
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Pressured by police pension costs, Norridge trustees voted to hike the village’s property tax levy by more than 35 percent.
Homeowners in the Cook County village of Norridge could soon be looking at higher property tax bills – for reasons a growing number of Illinoisans find familiar.
On Nov. 14, Norridge trustees voted to approve a property tax levy 35.5 percent higher than the previous year’s, or to $1.6 million from just less than $1.2 million. The cause? The growing cost of the village’s police pensions and a new state law dictating the pension funding level.
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Norridge is far from the first municipality to see pension costs spike the property tax levy. The small southern Illinois city of Carterville hiked its levy upwards of 30 percent – its largest in history – to keep up with rising public safety pension costs. Peoria, Rockford and Chicago all face pension crises.
In the nearby suburb of Harvey, growth in public safety pension costs has plunged the city into fiscal crisis. After failing to maintain required pension funding levels, the Illinois state comptroller intercepted $3.3 million in Harvey’s tax revenue. The suburb has sent layoff notices to dozens of police and fire employees, compromising today’s public services to pay for yesterday’s pensioners.
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Moody’s calls it a “conundrum” for Illinois. From their report: “… the population loss and relatively sluggish employment trends suggest a degree of economic vulnerability that poses a conundrum: revenue growth from existing sources will be too tepid to offset escalating fixed costs, while new taxes could threaten to increase the outflow of residents.”
These new comments are significant because Moody’s has long considered tax hikes a budget-balancing option for the state. That’s not surprising since Moody’s priority is the well-being of bondholders, not taxpayers. The agency’s ratings reflect the likelihood that bondholders get repaid – and tax hikes make repayment more likely.
But that’s only true as long as tax hikes don’t destroy the tax base and, ultimately, make the repayment of bonds less likely. It appears the flight of Illinoisans has gotten so big that Moody’s can no longer ignore it.
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CHICAGO, Feb. 19, 2019 /PRNewswire/ -- For every retiree taking money out of a public pension fund in Cook County, there is barely one current employee putting money in, a sign of growing demographic pressure on underfunded retirement plans, according to the Debt Disclosure Report issued today by Cook County Treasurer Maria Pappas.
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- There are 135,757 local government employees, compared with 126,528 retirees, a ratio of just 1.07 to 1, according to an analysis of 384 governments in Cook County by the Office of Cook County Treasurer Maria Pappas.
- The City of Chicago reports 35,655 employees and 47,592 retirees.
Despite Record Bull Market, Pension Plans in Miserable Shape: Illinois the Worst
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If you can't get out of Illinois, do the second best thing, Get the Hell Out of Chicago.
By the way, Chicago is not "headed" for insolvency, it's already there, but it is just not recognized yet.
After years of pushing a Las Vegas-style casino to boost tourism and much-needed revenue, Chicago’s leaders seemingly hit the jackpot when Illinois lawmakers approved one as part of a massive gambling expansion.
But obstacles remain before anyone can place any bets. The city must convince state lawmakers to vote on a plan that officials say makes the casino more profitable as well as choose a location, which already has sparked disputes.
Here’s a look at the issues ahead:
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Chicago would use profits to pay down pension debt.
Payout problems
Revenue estimates vary. State experts agree the Chicago casino will easily outperform Illinois’ highest-grossing casino, Rivers Casinos in the suburb of Des Plaines, which generated $440 million last year with its 1,200 gambling positions. The feasibility study said one site at a former hospital could gross over $950 million by year five.
But there’s a big hitch.
The same feasibility study said the “onerous ” tax and fee structure in the gambling law — the highest nationwide — would make a Chicago casino “not financially feasible.” The effective tax rate could be up to 72%, including a 33% tax on gross casino receipts that Chicago would use for police and fire pensions. The one-third rate, which applies to Chicago and not the other casinos, was written into the plan after lawmakers rejected the idea of a city-owned casino.
The study concluded any casino operator’s revenue would “likely equate to a few pennies on the dollar.”
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In 1983, Mayor Harold Washington stunned many when he revealed the city’s $150 million deficit, much worse than predecessor Jane Byrne had let on.
When Mayor Rahm Emanuel took office in 2011, he pegged the city’s budget shortfall at $636 million, blaming predecessor Richard M. Daley for profligate spending. Lightfoot faced similar circumstances in 2019, when she said Emanuel left her an $838 million gap.
Ralph Martire, a professor of public policy at Roosevelt University and executive director of the left-leaning Center for Tax and Budget Accountability, anticipates the next mayor will be in a similar boat. The center projects a deficit between $500 million and $600 million heading into 2024 — mirroring estimates in Lightfoot’s most recent budget forecast.
Unlike Lightfoot, Chicago’s next mayor won’t have a cushion of federal funds to rely on. The $1.9 billion the city received from the federal American Rescue Plan has largely been allocated. Most went to filling COVID-19 pandemic-induced budget holes in prior years, leaving little for whoever takes City Hall’s top job.
Adding to the tab: a reported asset loss of roughly 12% in the city’s pension funds from a stock market tumble in 2022, meaning bigger obligations loom ahead.
Even so, University of Chicago professor Justin Marlowe, who studies public finance, said Lightfoot leaves the city in better fiscal condition than her predecessors. She secured a long-sought casino that, once up and running, will help pay for lagging police and fire pensions, though even by city officials’ projections, it will only pay for roughly 9% of the annual retirement benefit costs.
Her last budget included a $242 million advance pension payment to blunt the impact of last year’s market downturn. Lightfoot’s efforts helped lead to credit rating boosts, increasing its standing among investors.
The challenge will be keeping that momentum going, and the two candidates have differing views about whether there is enough money already in the system or if they will need to raise revenue to do more, Marlowe said.
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As mayor, Lightfoot generally avoided big property tax increases but still hiked the city’s levy — from $1.54 billion in her first budget to $1.73 billion in 2023 — to keep up with rising pension costs. Lightfoot also implemented a policy tying property tax increases to inflation, which she argued made practical sense for both the city and taxpayers, eliminating the need for massive hikes while providing consistent pension funding.
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