Chicago "Junking" Triggers $2.2 Billion Payment, Deepening Financial Crisis

Tyler Durden's picture

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.

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.

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:

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Moody's statement:

Rating Action: Moody's downgrades Chicago, IL to Ba1, affecting $8.9B of GO, sales, and motor fuel tax debt; outlook negative

Also downgrades senior and second lien water bonds to Baa1 and Baa2 and downgrades senior and second lien sewer bonds to Baa2 and Baa3, affecting $3.8B; outlook negative

New York, May 12, 2015 -- Moody's Investors Service has downgraded to Ba1 from Baa2 the rating on the City of Chicago, IL's $8.1 billion of outstanding general obligation (GO) debt; $542 million of outstanding sales tax revenue debt; and $268 million of outstanding and authorized motor fuel tax revenue debt.

We have also downgraded the following ratings on debt secured by net revenues of Chicago's water and sewer enterprises: to Baa1 from A2 on $38 million of outstanding senior lien water revenue bonds; to Baa2 from A3 on $2.3 billion of outstanding second lien water revenue bonds; to Baa2 from A3 on $35 million of outstanding senior lien sewer revenue bonds; and to Baa3 from Baa1 on $1.5 billion of outstanding second lien sewer revenue bonds.

We have also downgraded to Ba2 from Baa3 the rating on $6 million of outstanding MetraMarket Certificates of Participation (COPs), Series 2010A, and to Ba3 from Ba1 the rating on $3 million of outstanding Fullerton/Milwaukee COPs, Series 2011A.

Finally, we have affirmed the Speculative Grade (SG) short term rating on $112 million of Chicago's outstanding Sales Tax Revenue Refunding Bonds, Series 2002.

The outlook on all long term ratings remains negative.


The Ba1 rating on Chicago's GO 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. Whether or not the current statutes that govern Chicago's pension plans stand, we expect the costs of servicing Chicago's unfunded liabilities will grow, placing significant strain on the city's financial operations absent commensurate growth in revenue and/or reductions in other expenditures. The magnitude of the budget adjustments that will be required of the city are significant. Furthermore, Chicago's tax base is highly leveraged by the debt and unfunded pension obligations of the city, as well as those of overlapping governments. Balanced against the city's many credit challenges are several attributes, the greatest of which is the city's broad legal authority to tap into its large and diverse tax base for increased revenue.


Our negative outlook reflects our expectation that Chicago's credit challenges will continue, both in the near term and in the long term. Immediate credit challenges include potential draws on liquidity associated with rating triggers embedded in the city's letters of credit (LOCs), standby bond purchase agreement (SBPA), lines of credit, direct bank loans, and swaps. The current rating actions give the counterparties of these transactions the option to immediately demand up to $2.2 billion in accelerated principal and accrued interest and associated termination fees. Of this amount, the GO and sales tax revenue rating actions trigger $1.7 billion of potential payments; the second lien water revenue rating action triggers $99 million of potential payments; and the second lien sewer revenue rating action triggers $355 million of potential payments.

The negative outlook also reflects our expectation that Chicago's credit quality will weaken as unfunded liabilities of the Municipal, Laborer, Police, and Fire pension plans grow and exert increased pressure on the city's operating budget. In the near term, Chicago's administration must comply with a 179% contribution increase to its Police and Fire pension plans in 2016.

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 plans' 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. Annuitant payments would materially exceed current employer contribution levels. In our view, Chicago's ability and willingness to fund annuitant payments, should they be required of the city, is uncertain.

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Latina Lover's picture

What else does Chicago and Detroit have in common besides crooked politicians and a parasitical bureaucracy draining the body  politic dry?

TruthInSunshine's picture

Maybe Rahm "Dual Citizen but Israeli Firster" Emanuel can borrow money from Israel (that Israel was gifted by CONgress on behalf of U.S. Taxpayers) to stave off bankruptcy of his incredibly corrupt union fiefdom for a few more years?

Atlas_shrugging's picture

Reality as the final arbiter...couldn't happen to a nicer chap

NoDebt's picture

I feel a lot of "but I was promised!" happening in Chicago the next few years.

The Detroit "template" to be invoked, if I had to guess.  ~30% cut in pensions.  Creditors to be made whole, though.  I'd buy the shit outta those bonds.


I am more equal than others's picture



Maybe Obama can go back and do what he does best, organize the community.  Organize the bread and soup lines, organize the crime, organize the street protests.  Lead the masses, lead on my captain. 

TahoeBilly2012's picture

"You have to create a crisis (debt) before you never let it go to waste (new world order)"

localsavage's picture

We had to unpension some folks.

boattrash's picture

Maybe their beloved mayor can find his way to a lamp post, and show us his best Mussolini impression!

Mayer Amschel Rothschild's picture

Going according to plans.  Despot of non-USA allegiance in place to oversee martial law when executive order is given.  What's everyone surprised about.

astoriajoe's picture

Didn't they just try the Detroit template? Or maybe adjusting pensions before bankruptcy is the Chicago Template, to be followed soonafter by the Deteroit template, then maybe the Ferguson template.

We're rich in templates if poor in cash.

max2205's picture

Coincidence that Moody s and the court waited until after the election to make their move...


I don't think so!



t0mmyBerg's picture

saw this coming and we left chicago in 2013.  next up will be loss of services and the degentrification of the city.  if oyu have lived there you know there is all kinds of marginal realestate that pushed out into formerly semi-blighted areas as things got better after the 70s.  The screw has turned and the cycle peaked.  downhill from here.  you dont want to be there when the gangs come back in to reclaim what was theirs

smlbizman's picture

how much of this is know, never let a crisis go to waste......."if it wasnt for that evil moodys..we wouldnt have to tax the life out of you...


and dont forget about my town ten miles down the road....charm city...

Bastiat's picture

Staged?  Read the Moody's report.  Those pension obligations are discounted at a projected rate of return on invested assets.  That rate of return is usually based on a lagging multi-year moving average. How's the fixed income component of that looking?   Of course there could be some exposure to stocks too. . . . realistically, those unfunded pension liabilities are double what you see in that table.

McCormick No. 9's picture

Couldn't happen to a nicer place...

Freddie's picture

I have a relative who had a retired fire chief or captian retire with his psycho wife on their street.  They were absolutely evil people and everyone on the street hated them.   My sincerest hope is that his pension takes a 50% or more haircut.  Evil **cking people.  

Believe me - these union people will be on a firing squad to kill you and your family if that will keep their pension going.

TruthInSunshine's picture

Fuck you Abe Foxmann, Alan Dershowitz, Jack Abramoff, Bernie Madoff, Sam Israel, Jonathon Pollard, Scooter Libby, Richard Perle, Paul Wolfowitz, Eric Cantor, Jamie Di(a)Mon(d), Lloyd Blankfein(stein), et al.

Kirk2NCC1701's picture

Antisemite?  He said nothing about Palestinians. 

Perhaps you confuse Jews with Zionist (who, as political group, are fair game).  Not all Jews are Zionists, and not all Zionists are Jews.  And many/most European 'Jews' have little or no Hebrew DNA in them.

Get clarity or stop "Bearing false witness against thy neighbor" with incorrect terminology, whichever is the case.

Fukushima Fricassee's picture

Cold as hell, dirty lakes , third world corruption?

dead hobo's picture

Here's the plan.

1) Declare bankruptcy and clean the slate.

2) Start stealing again.(aka finance current expenses with long term debt. Be generous.)

3) Restore bloated pensions for favored politicians and their top supporters.

4) Start calling Chicago "The City That Works" again.

doctor10's picture

could be wrong I suppose-but the idea that any "pension" could be "Constitutional " or "Un-Constitutional" somehow defines a good part of the problem

matagorda's picture

The Illinois constitution has a line that reads, "the pensions of state employees shall not be impaired."  If they expect retirees to share the burden, they need to pass an amendment to the state constitution.

Butterflying's picture

My last pay check was $9500 working 12 hours a week online. My sisters friend has been averaging 15k for months now and she works about 20 hours a week. I can't believe how easy it was once I tried it out. This is what I do...

Fukushima Fricassee's picture

I shit on these criminals and if you pay taxes there they shit on you.

new game's picture

greece 101, well versed and paper tyme big tyme...

VinceFostersGhost's picture



Good, after Greece is gone we'll have Chicago to talk about.

Yen Cross's picture

  That what happens when you have a corrupt Obama administration stooge named Ram E. Manhole in charge of running the one of the most corrupt cities in Amerika.

Oldwood's picture

Definitely change you can believe in.

saints51's picture

Very true indeed. When you think about it, all major cities in the USA were built from crime or just evil. Illegal booze,cocaine,land theft for mineral rights or murder,porn,etc,etc.

FireBrander's picture


Chitcago is run by CORPORATE AMERICA.

Yes, the political bend is to the left; but they can only "suggest" political moves...corporate America must give it's final approval.

Example..the Liberals wanted to "stick it" to Walmart over pay and benefits shortfalls...but their plan also stuck Sears and Target in the ass...both based in Illinois...the Liberals backed down...tell me again who runs Chitcago...or Illinoise for that matter?

You are not witnessing the failure of Liberalism (even though it's heavily involved)..the failure here is of Crony Capitalism...the people of Illinois have been fleeced...Private Profits and Social Losses...

The people getting these "pensions" do not put the money under the mattress...they spend it!...those billions all flow into corporate coffers...always follow the money...

Buckaroo Banzai's picture

"Corporate America" doesn't give a fuck about Chicago. The gravy train starts and ends in the District of Columbia. Chicago is a rounding error.

markar's picture

Target is based in Minneapolis, but we get your point

The Chief's picture

No chance that these "retirees", IE, Parasites, will see their pensions. Hope they have a backup plan....

Monty Burns's picture

The good thing is that they're all young enough to take up other employment.

B2u's picture

I used to live in Illinois, about 35 miles north of Chicago.  The handwriting was on the wall and three years ago I retired at age 54 and left Illinois.  Obama and the Dems can continue to destroy Illinois.  Good luck.   Oh, I now live in the tropics, so good luck living in the United States.

Oldwood's picture

I hate braggers!

But obviously becoming acclimated to a more native population helps with your transition to a tropical lifestyle.

Calmyourself's picture

That is when you work for the .gov or its subsidiaries, teachers, etc.  You stop "working" they give you double or triple what you paid in by taxing the shit out of the still productive who eventually say screw this shit and move to a cash economy.  Then .gov bans the cash economy for your safety, terrorism etal, get it now?

Max Cynical's picture

"The handwriting was on the wall and three years ago I retired at age 54 and left Illinois."

Hope you got a lump sum payout.

MarkAntony's picture

The financial situation is the biggest, best kept secret in this city. It was not discussed at any real depth during a recent mayoral election or the secondary runoff, it is not discussed in the mass media, it is not talked about at any social events...  Eat, drink and be merry is the motto of the day in Chicago politics, every day, and while the Downtown area is bustling with tourists and locals shopping and devouring the local food fare, the south and west sides resemble Iraq or Syria with daily shooting to spice up our routines...

All it takes is just that particular, tiny little straw to fall on the cities back, and like the proverbial camel it will SNAP with a bang to be heard around the world...