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.”

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Moody's holds the City accountable, points to the irresponsible SSC decision and Rahm whines about it. Amusing as hell.

MrVicchio said:

Moody's holds the City accountable, points to the irresponsible SSC decision and Rahm whines about it. Amusing as hell.

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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.

donsutherland1 said:

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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Yep. And that makes it that much harder to resolve the issue.

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.

The real question to ask is Chicago on a death spiral?

MrVicchio said:

The real question to ask is Chicago on a death spiral?

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Nothing is inevitable. Remember that New York was once virtually going bankrupt too.

MrVicchio said:

The real question to ask is Chicago on a death spiral?

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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.

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.

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.

ludin said:

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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I love the idea of a neutral third party. How would you put it together?

MrVicchio said:

Moody's holds the City accountable, points to the irresponsible SSC decision and Rahm whines about it. Amusing as hell.

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Mornin Vic. :2wave: How was the Illinois Supreme Court's Decision irresponsible? Moreover this hits all of Illinois and not just Chicago. Illinois is 2 downgrades from Junk Status.



Yet the Illinois court blows right through this judicial standard. Based on its prior rulings, the court opines that “neither the legislature nor any executive or judicial officer may disregard the provisions of the constitution even in case of a great emergency” or “for economic reasons.”

If pensions can be modified, the court opines, then “no rights or property would be safe from the State. Today it is nullification of the right to retirement benefits. Tomorrow it could be renunciation of the duty to repay State obligations. Eventually, investment capital could be seized.” This irony of this slippery-slope fallacy is that by shielding pensions the Illinois judges are making it more likely that the state will renege on debt or other obligations. The justices cavil that politicians “made no effort to distribute the burdens evenly among Illinoisans” and could “have sought additional tax revenue.” Yet Illinois raised taxes by a record amount in 2011. The judges even suggest that it is unconstitutional to require government workers, rather than taxpayers, to shoulder the pension burden.

Republican Governor Bruce Rauner has floated an alternative: a state constitutional amendment allowing pension modifications, which would require a public referendum and two-thirds vote of the legislature. Barring that, Illinois taxpayers may want to start contemplating Indiana or Florida residency.....snip~


Illinois Pension Blowup - WSJ

donsutherland1 said:

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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That is because Moodys knows of the overlap with the City, and the County. As well as all the other pension Crisis' in Illinois. So no they weren't being harsh. Moreover the city of Chicago has more Cops on retired pensions than they do cops on the force.



Illinois harbors hundreds of hidden pension crises.....

Illinois’ severely underfunded pension liability for the five state-run pension funds has earned national media attention. But Illinois is home to many other pension crises that too often fly under the radar. There are 675 public pension funds in Illinois. In addition to the five state-run funds, there are 359 suburban and downstate police pension funds, 301 suburban and downstate fire pension funds, a pension fund for suburban and downstate municipal workers, six pension funds in Chicago and three pension funds in Cook County, which overlaps with the city of Chicago.

These pension funds cover more than 1 million people, or 8 percent of the state’s total population, when active workers, retirees and other beneficiaries are accounted for.

Collectively, pension funds in Illinois had an unfunded liability exceeding $144 billion and an aggregate funding ratio of less than 50 percent in 2012, according the biennial pension report published by the Department of Insurance, or DOI.....snip~

https://www.illinoispolicy.org/illinois-harbors-hundreds-of-hidden-pension-crises/



Which they say they will be out with a report later this year.....and it will only be worse.

Blue_State said:

I love the idea of a neutral third party. How would you put it together?

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It would be a third party negotiating party at the table that represents the tax payers. this is to ensure that state officials are not pandering to unions and giving into their demands.
these 3rd party auditors can object to any proposal that they feel is outside the taxpayer interest.

there I no outside interference with this 3rd party company other than they get a copy of the proposal. they see what is in the proposal and any meeting with any party is recorded
and taped for auditing purposes.

any meeting has an internal auditor present to make sure no coercion is going on.
the 3rd party can amend the proposal to reflect taxpayers interest in this meeting that they feel is out of line.

IE the state agrees to increase pension contributions by 10%. they can object to this until a better deal is reached.
or they can offer another suggestion such as more contributions to healthcare or pensions from workers.
or not as much of a pay increase to offset the difference.

the problem that I have with public unions is that there is little profit that states make. I don't see how unions can demand more and more when there is 0 profit being made.
the fact that these politicians give into these union demands with little regard to future cost to taxpayers tells me there is collusion and bad faith contracting going on.

they continue to promise things they can't hope to pay for and then put it on the backs of taxpayers to some how fund their illegal promises.

ludin said:

It would be a third party negotiating party at the table that represents the tax payers.

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Isn't that what elected officials are supposed to do, in part?

In terms of implementation, establishing an independent entity (perhaps led by appointees with staggered terms and some professional staff) of some kind would probably be the easy part. Specifying what constitutes taxpayer interests would be challenging. Focusing more narrowly on authority to block terms of agreements or policies that create significant new unfunded pension liabilities might be more feasible, but constitutional issues might also be involved e.g., such an office would fundamentally erode the role of representative government. Moreover, if the entity's funding were tied to the legislative process, its viability would be undermined. Finally, it's unlikely that the Governor, State legislature, etc., would be willing to cede such authority to an independent entity.

MrVicchio said:

The real question to ask is Chicago on a death spiral?

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Chicago is still a major centre for a lot of industries so I doubt it very much.

Carjosse said:

Chicago is still a major centre for a lot of industries so I doubt it very much.

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Morning Carjosse. :2wave: A lot of Business is leaving Chicago and Illinois, so to are a lot of people. Many have gone due to the Corporate Taxes. They are so desperate that Emanuel is ready to jump on the bandwagon for a Chicago Casino. Its pathetic.....laying a hope on people showing up to lose their money gambling. But now they are looking at that Medical Marijuana revenue to see if that can help them out.




Safely elected in January 2011, Democrats then raised the state’s 3% flat income tax rate to 5% and its corporate rate from 7.3% to 9.5%, the fourth highest in the country. All $7 billion a year in new revenues have gone to pension payments, which will leave a huge new hole in the budget when the supposedly temporary tax hikes are phased out in 2015.

It’s a sign of their desperation that the state’s business lobbies are supporting the reform as the best they can hope for. Others want special tax breaks to offset the 2011 tax hike. Archer Daniels Midland ADM +1.49% (Decatur) and Office Max (Naperville) have threatened to move their corporate headquarters if the state doesn’t guarantee $75 million in tax breaks......snip~

https://www.illinoispolicy.org/news/wsj-illinoiss-fake-pension-fix/

This should be headline news on all the networks but because illinois is super-liberal and obozo's state, the story has been censored by the non-internet press.

Just cancel the pensions. These are govt employees which means they are affirmative action hires and should have never had the job in the first place. The taxpayers owe them nothing.

TextDriversKill said:

This should be headline news on all the networks but because illinois is super-liberal and obozo's state, the story has been censored by the non-internet press.

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You mean just about Chicago? As Illinois Pension Reform made National News. As it has National Implications.




Illinois Supreme Court Kills Pension Reform Effort
BY BLOOMBERG NEWS


The Illinois Supreme Court rejected the state's solution for its worst-in-the-U.S. $111 billion pension shortfall, handing organized labor a victory while deepening a crisis with national implications.

Across the nation, state and local governments grapple with pension deficits that exceed a combined $2 trillion, according to a Moody's Investors Service report last year. Closing that gap by reducing payments to retirees would abrogate union contracts in many states and even constitutional guarantees. In Illinois, Chicago is grappling with $20 billion in unfunded pension liabilities that threaten its solvency. "Crisis is not an excuse to abandon the rule of law," the seven-member Illinois court ruled. "It is a summons to defend it."

Friday's ruling raised the prospect of further downgrades by credit-rating firms. Investors already have been punishing Illinois. Its 10-year bonds yield about 3.7 percent, the highest since November and the most among the 20 states tracked by Bloomberg.....snip~

Illinois Supreme Court Kills Pension Reform Effort - Investors.com

MrVicchio said:

Moody's holds the City accountable, points to the irresponsible SSC decision and Rahm whines about it. Amusing as hell.

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Surely, siting the Obama Presidential Library in Chicago will make all this talk go away :shock:

Blue_State said:

I love the idea of a neutral third party. How would you put it together?

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For what it's worth, it works in Canada. Here in Ontario, we have two of the most profitable and strongest public sector pension plans in the world. The government has zero access to the funds or management/control over the funds/reserves. They are operated by independent boards and investment committees, and all plans are jointly, equally, funded by the employees and the government.

Two problems that US public pension plans seem to have is that 1) employees aren't paying enough into the plans to fund their future retirement expectations and 2) governments have too much access to plan reserves and/or deferral of payments into the plans and divert funds to other government programs and/or obligations.

CanadaJohn said:

Surely, siting the Obama Presidential Library in Chicago will make all this talk go away :shock:

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Heya CJ. :2wave: Nah, not even BO can make this all go away.....but I am sure he wont mind them raising taxes. Which some park (Jefferson or Washington) will still be taken care of.



Several years ago, DHS began offering welfare recipients the opportunity to intern at department offices around the state. It seemed like a win-win: extra hands at the office while helping people in need. But in the same complaint about being understaffed, the union complained that these welfare recipients were taking away work opportunities from dues-paying AFSCME members.

In 2011, the state attempted to calculate how much it costs to keep so many accounting systems. But even computing the cost of operating all these accounting systems was too difficult, so the best estimate the auditor general could come up with is $24 million to operate about half of the systems.

•In recent years, the state has attempted to save money by limiting the number of individual water bottles and water coolers bought for state offices. Many of these buildings have drinking fountains in the hall, so water coolers or individual bottles are unnecessary. But these savings never happened. Why? After AFSCME complained, an arbitrator sided with the union. The reason was appalling: It wasn't because of health or safety concerns, or because there was anything wrong with the water from the fountains, or even a lack of water fountains. The arbitrator said that because the bottled water had been provided in the past, it could not be taken away. (Apparently bottled water, like pensions, cannot be diminished or impaired.).....snip~

First, lay off all the state workers - Chicago Tribune

MMC said:

Heya CJ. :2wave: Nah, not even BO can make this all go away.....but I am sure he wont mind them raising taxes. Which some park (Jefferson or Washington) will still be taken care of.



Several years ago, DHS began offering welfare recipients the opportunity to intern at department offices around the state. It seemed like a win-win: extra hands at the office while helping people in need. But in the same complaint about being understaffed, the union complained that these welfare recipients were taking away work opportunities from dues-paying AFSCME members.

In 2011, the state attempted to calculate how much it costs to keep so many accounting systems. But even computing the cost of operating all these accounting systems was too difficult, so the best estimate the auditor general could come up with is $24 million to operate about half of the systems.

•In recent years, the state has attempted to save money by limiting the number of individual water bottles and water coolers bought for state offices. Many of these buildings have drinking fountains in the hall, so water coolers or individual bottles are unnecessary. But these savings never happened. Why? After AFSCME complained, an arbitrator sided with the union. The reason was appalling: It wasn't because of health or safety concerns, or because there was anything wrong with the water from the fountains, or even a lack of water fountains. The arbitrator said that because the bottled water had been provided in the past, it could not be taken away. (Apparently bottled water, like pensions, cannot be diminished or impaired.).....snip~

First, lay off all the state workers - Chicago Tribune

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Say MMC, you live there, are things that bad?? You may move south, the waters warmer, longer growing seasons and everybody has an oil well in his back yard.

Montecresto said:

Say MMC, you live there, are things that bad?? You may move south, the waters warmer, longer growing seasons and everybody has an oil well in his back yard.

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I do hate the cold and winterweather Monte. Oh and the other 6 months of missing sunshine. But somebody other than Joe Walsh has to keep them on their toes around here. :2razz:

CanadaJohn said:

For what it's worth, it works in Canada. Here in Ontario, we have two of the most profitable and strongest public sector pension plans in the world. The government has zero access to the funds or management/control over the funds/reserves. They are operated by independent boards and investment committees, and all plans are jointly, equally, funded by the employees and the government.

Two problems that US public pension plans seem to have is that 1) employees aren't paying enough into the plans to fund their future retirement expectations and 2) governments have too much access to plan reserves and/or deferral of payments into the plans and divert funds to other government programs and/or obligations.

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Another big problem, is unrealistic assumptions about returns on pension plan assets. This bias toward unrealistic assumptions occurs both in the private and public sectors. For purposes of illustration, below is the data for IBM, which has an underfunded corporate pension plan:



The plan assumes an 8% annual return. To put this assumption into a larger context, the 30-year Treasury yield is currently around 3.1%. An assumption somewhat above the Treasury yield might not be too bad, but one that is more than 2.5 times that yield is inflated. It is also inconsistent with the conservatism principle that is at the heart of accounting, but the application of that principle falls short of the ideal.

The end result is that firms can readily maintain unrealistic pension plan assumptions in their financial statements (with the overly optimistic assumptions being confined to the notes to the financial statements--that's why due diligence is so important). In practical terms, the rosy assumptions rationalize a pension funding level that is consistently below what is actually required. Over time, a large unfunded pension liability accumulates.

IMO, the underfunded nature of public and private pensions argues strongly for pension reforms that would require full funding (capping the underfunded liability at a modest percentage of the overall pension obligation to allow for fluctuations in returns and costs) and place a ceiling on estimated returns (perhaps no more than 100 basis points above the average 30-year Treasury yield over a set period of time). More robust funding requirements and more realistic assumptions about returns would greatly reduce the risk of chronic underfunding and the accumulation of substantial unfunded liabilities. Moreover, if returns proved higher than expected, the difference between pension assets and pension obligations would allow for reduced funding for a period of time, hence funding levels would, over the longer-term, be appropriate with respect to the actual pension obligations.