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Thread: Moody’s Downgrades Chicago Credit Rating To ‘Junk’ Bond Status

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    Moody’s Downgrades Chicago Credit Rating To ‘Junk’ Bond Status

    CHICAGO (CBS) — Citing the city’s underfunded pension crisis, Moody’s Investors Service downgraded Chicago’s debt to junk bond status on Tuesday.The Ba1 rating means that Chicago’s $8.1 billion in debt carries a substantial credit risk. That credit rating is also just a few levels above bonds that are in default.
    “The Ba1 rating on Chicago’s debt incorporates expected growth in the city’s highly elevated unfunded pension liabilities,” Moody’s said.
    The service cited the state Supreme Court’s recent decision to toss out the state’s pension reform bill as unconstitutional, along with concerns that the city will be able to meet its pension obligations in the future.
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    The move is not only financially embarrassing for the city, it will also increase the costs for future borrowing.
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    Mayor Rahm Emanuel criticized the downgrade.
    “While Chicago’s financial crisis is very real and at our doorsteps, today’s irresponsible decision by Moody’s to downgrade the City’s credit by two steps goes far beyond that reality,” he said. “Their decision was driven solely by the overturning of a state pension bill that did not include Chicago’s pension reform, yet they did not downgrade the State of Illinois.”
    Moody's holds the City accountable, points to the irresponsible SSC decision and Rahm whines about it. Amusing as hell.
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    Re: Moody’s Downgrades Chicago Credit Rating To ‘Junk’ Bond Status

    Quote Originally Posted by MrVicchio View Post
    Moody's holds the City accountable, points to the irresponsible SSC decision and Rahm whines about it. Amusing as hell.
    IMO, the court decision is highly relevant, even if it didn't specifically concern Chicago's pensions. It's relevant, because if Chicago attempts to reform its pension system, there is risk that the same precedent could be used to overturn the reforms.

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    Re: Moody’s Downgrades Chicago Credit Rating To ‘Junk’ Bond Status

    Quote Originally Posted by donsutherland1 View Post
    IMO, the court decision is highly relevant, even if it didn't specifically concern Chicago's pensions. It's relevant, because if Chicago attempts to reform its pension system, there is risk that the same precedent could be used to overturn the reforms.
    Yep. And that makes it that much harder to resolve the issue.
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    Re: Moody’s Downgrades Chicago Credit Rating To ‘Junk’ Bond Status

    Congrats Chicago, the only one worse than you is Detroit!

    This rating to junk status *had* to happen when you look at the numbers objectively, not politically as Emanuel suggests. Everything is going against the math city leaders are trying to put forth to get themselves out of a terrible fiscal situation from decades of over-promising.

    We are talking about $8.1 billion in general obligation debt, and roughly $550 million increase in city pension payments in 2016 thanks to Illinois Supreme Court decision. Before the downgrade Chicago was already in the hole $300 million this year. Because we are talking about "junk" status now Chicago is looking at $2.2 billion in accelerated debt payment or attempts to restructure. And with that status any type of restructure is going to be painfully expensive and messy. I read somewhere that Emanuel plans to spend $200 million to "eliminate swaps contracts used to hedge interest-rate risk" using variable rate. And that should tell you even they knew the results of the downgrade would mean they have to stop punting.

    Moody's is saying itself, as part of the reasoning for the downgrade, that Chicago is facing simultaneous spending cuts and tax increases no matter what the courts do. Assuming Chicago ends up in a position of Illinois forcing the Chicago to pay retirees directly out of budget cash year on year there is no reason to exclude the chance of yet another rating cut which would put Chicago on par with Detroit. The other thing to keep in mind is we are talking about *unfunded* liabilities here, to the tune of another $19 - $22 billion on top of the existing debt (sources vary on this number.) The options for dealing with this carrying junk bond status are limited, and the cost will be ridiculous.

    Basically all the prior warnings about pension deals with public employee unions in exchange for campaign money has come back to bite decades of Democrat city leaders in the ass. In this case you can completely blame these deals in exchange for votes going back a very long time and credit agencies are speaking. This is nothing more than an over-promised pension fiasco there is no good way out of. All the major credit agencies have issued plenty of downgrades and all for the same reason. Chicago is living far beyond their means and doing so in a manner where kicking the can down the road has a limit. Welcome to the conclusion of overspending.

    None of this should be a surprise. Moody has dropped Chicago debt some 8 times since 2010 alone. What is shocking is both Fitch and S&P still have Chicago in the single A category, but I bet they start to degrade that with this news. The good news is Chicago does have some painful options on raising taxes to obtain new revenue unlike Detroit, the bad news is they do this long enough and they will end up like Detroit anyway.
    "Every time something really bad happens, people cry out for safety, and the government answers by taking rights away from good people." - Penn Jillette.

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    Re: Moody’s Downgrades Chicago Credit Rating To ‘Junk’ Bond Status

    The real question to ask is Chicago on a death spiral?
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    Re: Moody’s Downgrades Chicago Credit Rating To ‘Junk’ Bond Status

    Quote Originally Posted by MrVicchio View Post
    The real question to ask is Chicago on a death spiral?
    Nothing is inevitable. Remember that New York was once virtually going bankrupt too.

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    Re: Moody’s Downgrades Chicago Credit Rating To ‘Junk’ Bond Status

    Quote Originally Posted by MrVicchio View Post
    The real question to ask is Chicago on a death spiral?
    I doubt it. But some fiscal responsibility is going to have to replace what management has been doing. Running a city on debt is no different than running a family on debt. Eventually, you are forced to get your head above water.

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    Re: Moody’s Downgrades Chicago Credit Rating To ‘Junk’ Bond Status

    Some additional details from Moody's:

    The Ba1 rating on Chicago's GO[General Obligation] debt incorporates expected growth in the city's highly elevated unfunded pension liabilities. Based on the Illinois Supreme Court's May 8 overturning of the statute that governs the State of Illinois' (A3 negative) pensions, we believe that the city's options for curbing growth in its own unfunded pension liabilities have narrowed considerably...

    Developments involving the Municipal and Laborer plans present longer term risks to the city's credit profile. In our opinion, the Illinois Supreme Court's May 8 ruling raises the risk that the statute governing Chicago's Municipal and Laborer pension plans will eventually be overturned. If so, the city's obligation to fund the Municipal and Laborer plans would likely revert to that which existed before the statute took effect in January 2015. Under the prior funding requirements, the city's pension contributions were well below the plan's actuarial requirements. Therefore, if the Municipal and Laborer statute is overturned, and no other adjustments are made to plan revenues and/or expenditures, we believe the plans will continue to extinguish assets to pay annuitants. As the plans move toward insolvency, the city's credit standing will continue to deteriorate, given our view that the state may eventually implement legislation forcing Chicago to pay annuitants directly.


    Those details from Moody's explanation highlight the relevance of the Illinois Supreme Court's decision to Chicago's credit situation. IMO, the ratings agencies, including Moody's, remain behind the proverbial curve with respect to Illinois (which should be a junk rating), not that Moody's was too harsh with respect to Chicago.

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    Re: Moody’s Downgrades Chicago Credit Rating To ‘Junk’ Bond Status

    This is why public unions should not exist and if they do exist then there needs to be a neutral 3rd party approval process to protect tax payer dollars from thievery.
    Since this mess was created by the unions and the liberal party that controls IL and Chicago then they should have to fix it without sticking it to taxpayers.

    that isn't going to happen. I see Chicago going the way of Detroit there is no way without massive tax increases and huge cuts are they going to get it under control.
    even if they get it under control the massive obligations that they have just handed over to public unions is going to kill them.

    contracts are to be made in good faith. and these morons are supposed to protect the public interest not hand over the keys to the kingdom which is exactly what they have done.
    the people of Chicago should sue these morons and the public unions for misappropriation of tax dollars and conflict of interest in negotiating union pensions and contracts.

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    Re: Moody’s Downgrades Chicago Credit Rating To ‘Junk’ Bond Status

    Quote Originally Posted by ludin View Post
    This is why public unions should not exist and if they do exist then there needs to be a neutral 3rd party approval process to protect tax payer dollars from thievery.
    Since this mess was created by the unions and the liberal party that controls IL and Chicago then they should have to fix it without sticking it to taxpayers.

    that isn't going to happen. I see Chicago going the way of Detroit there is no way without massive tax increases and huge cuts are they going to get it under control.
    even if they get it under control the massive obligations that they have just handed over to public unions is going to kill them.

    contracts are to be made in good faith. and these morons are supposed to protect the public interest not hand over the keys to the kingdom which is exactly what they have done.
    the people of Chicago should sue these morons and the public unions for misappropriation of tax dollars and conflict of interest in negotiating union pensions and contracts.
    I love the idea of a neutral third party. How would you put it together?
    "We ain't a sharp species. We kill each other over arguments about what happens when you die, then fail to see the ******* irony in that." - Justin Halpern

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