What. A. Surprise.
Chicago "Junking" Triggers $2.2 Billion Payment, Deepening Financial Crisis
In early March, we discussed the rather deplorable state of Illinois’ public pension plans which, we noted, are underfunded by some 60%. On a statewide basis, making up the deficit would cost around $22,000 per household, which gives you an idea of the cost to taxpayers of the grossly underfunded pension liabilities.
A month later, we pointed out the fact that spreads between Chicago’s muni bonds and USTs had blown out to the tune of 60bps as mayor Rahm Emanuel's re-election became more assured. We also highlighted a WSJ graphic showing that when it comes to unfunded public worker pension liabilities per person, nobody does it like Chicago.
The situation worsened materially last Friday when the Illinois Supreme Court struck down a pension reform law that aimed at closing the state’s $105 billion hole.
Via The Chicago Tribune:
That ruling, it turns out, would be the death knell for Chicago’s credit rating, at least as far as Moody’s is concerned. Citing “expected growth in the city’s highly elevated unfunded pension liabilities,” the rating agency cut the city to junk at Ba1. This is bad news for Chicago for a number of reasons, not the least of which is the fact that Emanuel was looking to refi nearly a billion dollars in floating rate debt into fixed rate notes and borrow another $200 million to pay off the related swaps — clearly this will now be far more difficult. The ratings agency’s actions also given creditors accelerated payment rights, meaning the city could be on the hook for some $2.2 billion in principal and interest on its outstanding liabilities.
Needless to say, Rahm Emanuel is not happy. Here’s the Tribune again:
Emanuel attacked Moody's decision to downgrade the city's credit, but his remarks illustrate the grave financial situation the city faces.
"This action by Moody's is not only premature, but it is irresponsible to play politics with Chicago's financial future by pushing the city to increase taxes on residents without reform," said Emanuel in a statement, just hours after appearing on the South Side to bask in the formal announcement that President Barack Obama's presidential library would be built in Chicago.
One analyst was sympathetic to the mayor's argument that Moody's acted too quickly, but noted the message being sent about Emanuel's leadership as he enters a second term.
"A cut below investment grade is a major statement, implying that there is material risk to the city not paying its bondholders on time or in full," said Matt Fabian, a managing partner at Municipal Market Analytics. "To have gone there without waiting to see the city's approach to the current budget gap, or whether or not they will raise revenues is clear demonstration of a lack of confidence in city management. In other words, they see little reason to wait because they expect little in the way of a management response."
Chicago now has the dubious distinction of being the only city “in recent history” to carry such a low rating other than Detroit:
So we’re sorry taxpayers, but it looks like Chicago is going to need you to step up to the plate on this one:
In the end, this serves to underscore not only the pitiable plight of the country's pension plans (which, by the way, are likely to be far worse off on the whole than meets the eye due to the fact that managers cling to optimistic assumptions about investment returns in order to avoid having to revise the present value of their liabilities sharply higher) but also a worrying trend that we discussed earlier this week — namely, that state and city governments across America are going broke.
Here's a look at just how underfunded Illinois' pension system truly is:
Chicago "Junking" Triggers $2.2 Billion Payment, Deepening Financial Crisis
In early March, we discussed the rather deplorable state of Illinois’ public pension plans which, we noted, are underfunded by some 60%. On a statewide basis, making up the deficit would cost around $22,000 per household, which gives you an idea of the cost to taxpayers of the grossly underfunded pension liabilities.
A month later, we pointed out the fact that spreads between Chicago’s muni bonds and USTs had blown out to the tune of 60bps as mayor Rahm Emanuel's re-election became more assured. We also highlighted a WSJ graphic showing that when it comes to unfunded public worker pension liabilities per person, nobody does it like Chicago.
The situation worsened materially last Friday when the Illinois Supreme Court struck down a pension reform law that aimed at closing the state’s $105 billion hole.
Via The Chicago Tribune:
The Illinois Supreme Court on Friday unanimously ruled unconstitutional a landmark state pension law that aimed to scale back government worker benefits to erase a massive $105 billion retirement system debt, sending lawmakers and the new governor back to the negotiating table to try to solve the pressing financial issue.
The ruling also reverberated at City Hall, imperiling a similar law Mayor Rahm Emanuel pushed through to shore up two of the four city worker retirement funds and making it more difficult for him to find fixes for police, fire and teacher pension funds that are short billions of dollars.
The ruling also reverberated at City Hall, imperiling a similar law Mayor Rahm Emanuel pushed through to shore up two of the four city worker retirement funds and making it more difficult for him to find fixes for police, fire and teacher pension funds that are short billions of dollars.
That ruling, it turns out, would be the death knell for Chicago’s credit rating, at least as far as Moody’s is concerned. Citing “expected growth in the city’s highly elevated unfunded pension liabilities,” the rating agency cut the city to junk at Ba1. This is bad news for Chicago for a number of reasons, not the least of which is the fact that Emanuel was looking to refi nearly a billion dollars in floating rate debt into fixed rate notes and borrow another $200 million to pay off the related swaps — clearly this will now be far more difficult. The ratings agency’s actions also given creditors accelerated payment rights, meaning the city could be on the hook for some $2.2 billion in principal and interest on its outstanding liabilities.
Needless to say, Rahm Emanuel is not happy. Here’s the Tribune again:
Emanuel attacked Moody's decision to downgrade the city's credit, but his remarks illustrate the grave financial situation the city faces.
"This action by Moody's is not only premature, but it is irresponsible to play politics with Chicago's financial future by pushing the city to increase taxes on residents without reform," said Emanuel in a statement, just hours after appearing on the South Side to bask in the formal announcement that President Barack Obama's presidential library would be built in Chicago.
One analyst was sympathetic to the mayor's argument that Moody's acted too quickly, but noted the message being sent about Emanuel's leadership as he enters a second term.
"A cut below investment grade is a major statement, implying that there is material risk to the city not paying its bondholders on time or in full," said Matt Fabian, a managing partner at Municipal Market Analytics. "To have gone there without waiting to see the city's approach to the current budget gap, or whether or not they will raise revenues is clear demonstration of a lack of confidence in city management. In other words, they see little reason to wait because they expect little in the way of a management response."
Chicago now has the dubious distinction of being the only city “in recent history” to carry such a low rating other than Detroit:
Ciccarone noted that his firm's data showed Chicago's junk status rating is a level only reached in recent history by one other major city: Detroit, before it filed for bankruptcy in July 2013.
So we’re sorry taxpayers, but it looks like Chicago is going to need you to step up to the plate on this one:
Earlier market analyses have indicated that Chicago, unlike Detroit, has a varied economy and options for raising the needed revenue for righting its financial ship, but it won't be painless. "Raising taxes is going to have to be part of the solution," Ciccarone said.
Emanuel and city financial officials tried to downplay the action by Moody's, noting other major debt rating agencies had not downgraded city creditworthiness to such troublesome low levels. Budget Director Alex Holt called Moody's rating "an outlier."
For years, Moody's has warned the city about not addressing its pension problems, maintaining an intense focus not shared by other rating agencies, and also warned about city debt practices that Emanuel recently vowed to change.
Even so, Emanuel and the City Council last year put off making a decision on whether to enact a significant property tax increase to help cover the city's ballooning pension costs. That deferral came as Emanuel and aldermen prepared to run for re-election this spring.
Emanuel and city financial officials tried to downplay the action by Moody's, noting other major debt rating agencies had not downgraded city creditworthiness to such troublesome low levels. Budget Director Alex Holt called Moody's rating "an outlier."
For years, Moody's has warned the city about not addressing its pension problems, maintaining an intense focus not shared by other rating agencies, and also warned about city debt practices that Emanuel recently vowed to change.
Even so, Emanuel and the City Council last year put off making a decision on whether to enact a significant property tax increase to help cover the city's ballooning pension costs. That deferral came as Emanuel and aldermen prepared to run for re-election this spring.
In the end, this serves to underscore not only the pitiable plight of the country's pension plans (which, by the way, are likely to be far worse off on the whole than meets the eye due to the fact that managers cling to optimistic assumptions about investment returns in order to avoid having to revise the present value of their liabilities sharply higher) but also a worrying trend that we discussed earlier this week — namely, that state and city governments across America are going broke.
Here's a look at just how underfunded Illinois' pension system truly is:
