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Why Chicago Bonds Are Junk, In 7 Charts
Submitted by Michael Johnston At Fixed Income Database
The Windy City's financial woes are unlikely to blow over any time soon.
Following an Illinois Supreme Court ruling earlier this month, Chicago’s bonds received a downgrade to “junk” status by Moody’s. The ratings agency reiterated a negative outlook on all of the city’s long-term ratings, expressing concern about the narrowing pool of options for rescuing a badly underfunded pension system.
The journey to junk status started more than a decade ago with borrowing to fund pensions, and at least one major agency is concerned that the risk of default is increasing. Chicago’s fiscal troubles are a complex story, but a handful of charts can provide a bit of context to the current situation.
Chart #1: Massive Debt Burden
Simply put, Chicago is shouldering an enormous amount of debt. By some calculations, the city is on the hook for as much as $63 billion when pensions, long-term notes, and health insurance obligations are included. That amounts to a staggering $23,300 for every inhabitant of the city, representing a huge chunk of the annual income for the city’s residents and nearly 10 times the size of the per capita annual budget.
Chart #2: Growing Payments
While the current state of the city’s balance sheet is dismal, the real problem relates to what is expected to develop over the next decade. Chicago pension plan payments are expected to double from 2014 to 2015, and will then continue to rise for another decade before they begin to decline. By the time payments peak in 2026, they will be four times the 2014 level.
Chart #3: Limited Taxing Ability
The easiest way for a government to boost revenues is through tax increases. For cities, property taxes are often a primary revenue stream. While it is certainly possible that Chicago will raise property taxes — in fact, it’s a near certainty — there will be a limit to the increases possible. Illinois residents already pay the second-highest property taxes in the country.
Chart #4: Unrealistic Expected Rates of Return
The city’s pension liabilities have ballooned in part as a result of unrealistic expectations for the returns on the assets. For fiscal 2013, Chicago’s various pension plans were assuming annual rates of returns ranging from 7.5 percent to 8.25 percent.
Unfortunately, the actual performance has failed to live up to these lofty expectations. The Municipal Employees’ Annuity & Benefit Fund of Chicago (MEABF) reported a 10-year average return of just 5.6 percent as of 2014. The Laborers & Retirement Board Employees’ Annuity & Benefit Fund of Chicago (LABF) reported a “gross of fees” return of 6.3 percent for the 10 years ended March 31, 2015.
When the actual results fall short of expectations for an extended period of time, the gap between assets and liabilities can begin to rapidly grow. That’s exactly what has happened to Chicago’s pension plans; despite paying millions of dollars in fees — the police pension fund doled out over $8.6 million to managers and consultants in 2013 — returns have fallen far short of expectations.
Chart #5: Compounding Unrealistic Rates of Return
When it occurs over the course of a single year, the disconnect between the expected returns used by Chicago’s pension funds and reality are disappointing. But when they continue over an extended period of time, this gap can spell economic disaster. The difference between 7.75 percent and 5.60 percent in annual returns may not seem like much, but when these rates of return compound, a massive gap appears:
The MEABF pension fund has been assuming that its approximately $5 billion of assets will grow to about $9.8 billion over the course of 10 years. Based on historical returns, it will actually grow to $8.2 billion — leaving a gap of nearly $600 per resident. This same scenario is playing out across multiple pension funds, for even longer periods of time.
Chart #6: Accelerating Expenses
Although Chicago has increased revenue through a number of different tax strategies, expenses have been rising considerably in recent years as well.
Chart #7: Actual Junk
While Chicago’s budget issues are largely related to an underfunded pension system, the city isn’t exactly frugal in the way it spends money for other services. Many of the day-to-day aspects of city operations are extremely inefficient and expensive relative to other major metropolitan areas.
Reducing the cost of trash pickup obviously won’t solve all of Chicago’s problems; this service accounts for only a small fraction of the city’s budget. But the cost differences relative to other major American cities highlight the general lack of fiscal discipline that plagues the city.
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I worked for a state legislator in college a could years ago. Back then the teacher pensions had a deficit of over $200B. IT definitely hasn't gotten any better...
Chicago is a criminal conspiracy pretending to be a city. $200B is the good old days and the only people who win are the crooks.....
maybe obama can talk yellen into monetizing the chicago bonds too.
Ha! No need to talk Gramma into monetizing any bond. Consider it a done deal.
OOPA!
Junk due to a badly underfunded pension system?
So by that measure, maybe the USSA shold b junk, no?
IT IS JUNK, they just won't admit it......
Probably we can visualize this rather easily.
-
100 - the Level of Liabilities
12 - the Level of Revenue
12 - the Level of Annual Spending
5 - the Level of Infrastructure needing Repair
5 - the Level of Funds Extraction being placed on the City by Wealthy Interests
5 - the Level of Federal Taxes on Individuals who work
We Rahmed some folks!
Correctly labeling the corrupt queer as yet another Jew Commie, gets you thrown off the "conservative" Free Republic forum.
Chicago bonds are junk because the .gov workers sucked the life out of the tax payers when they gave themselves such generous retirement benefits, while at the same time they ran out the businesses that provided the tax payer any real opportunity to better themselves. Now Chicago is turning into a third world shithole like Detroit and Camden.
$1 Billion in Pensions, (MEABF), (LABF), (Police)... how many of these people live outside of Chicago and Move away or even Out of State...?
- Maybe these are Extracted Wealth Exported from the Economy
- Economic Leakage
- Current Account Balance USA = -$700 Billion (deficit)
- Current Account Balance Chicago = maybe -$10 Billion (Deficit)
- Foreign Ownership of Chicago Property
- Foreign Ownership of Chicago Investments
- Wall Street Extraction in Debt Burden = Maybe $10 Billion Annually
Can anyone imagine this .gov letting Chicago go bankrupt? I mean you have to be kidding me. They could be worse than Greece at the end of the day and this con man Marxist in the White House is bailing these guys out and you can take that to your progressive bank.
Just how is anyone's pension plan upside down?
Bonds have been in a bull market for 30+ years which should have resulted in above projected returns. Stocks while suffering a couple of big declines are still hovering at 9-10% ofr the last 20 years which again should have met or beat projected returns.
So where is all the fricking money? Did wall street steal it? Did those managing the pension funds steal it? Or have companies and governments just failed to put the money aside in order to boost reported profits or decrease budget defecits.
Regardless, once again this is a result of failure by our elected leaders. I say we take it out of their pockets when they go to collect their pensions, etc.
"Did those managing the pension funds steal it?" Ya think? The new govorner (r) ran an investment firm who actualy handeled investments for the city and state at some time. Red, Blue, they only care about grabbing what they can and fuck the future, its someone else's problem. Jail isnt enough for thse bastards. And dont think this isnt coming to your state or city, Chicago, California, New York are just the start. I cant imagine what those blowhards in Texas are hiding.
"So where is all the fricking money? Did wall street steal it? Did those managing the pension funds steal it? Or have companies and governments just failed to put the money aside in order to boost reported profits or decrease budget defecits."
Answer - yes
hehehe behold the results of decades of corrupt Liberalism. Happens every time.
Your falling into the classic liberl vs. conservative trap. Neither sides gives a fuck. Orange County, that bastion of wealthy tax hating Republicans was the biggest municiple bankruptsy in US history prior to Detroit . So fuck John Wayne and his replubican horse.
Precisely. +1 gazillion.
Your falling into the classic liberl vs. conservative trap. Neither sides gives a fuck. Orange County, that bastion of wealthy tax hating Republicans was the biggest municiple bankruptsy in US history prior to Detroit . So fuck John Wayne and his replubican horse.
Yeah, and that corrupt conservativism is sooooo much better. Idiot.
pensions are the ponzi schemes built to satify the retirement needs of previous generations
ewnionz still think they are viable - chicago is headed over the cliff like detroit because ewnionz aligned with their paid off judges keep driving their unsustainable deal
ORVILLE REDENBACHER TIME!!!
I am speechless, I am without speech.
Illinois doesn't tax state pensions which has created a tremendous amount of incentive over the decades to expand retirement benefits. During the Clinton years with the run up in the market prior to the dot com bust, Ill. pensions accounts were so far into the black that they were allowed to low or soft fund pensions accounts by about 20 or so percent.
And yet a terribly broken city I called home for well over a decade. The system of Aldermans which perhaps New Orleans applies as well, not needed and simply a way to add more graft. Every Alderman is given a transportation budget of something like 80 grand. My local Alderman would drive around in a limo. Had a friend who dated an Aldermans daughter. He got set up with a job as an inspector for the O'Hare expansion. His entire job was to show up twice a month and collect a check.
The pension obligation alone for the top 100 State teaching Superintendents is over 800 million dollars.
Walk around all you see is crumbling infrastructure, literally thousands of bridges with rotten cemet and exposed rebar in need of repair or replacement. It was a great place to live in the 80s, free parking and cheap rents. My last place trying to get out of it for under 350k and yet getting taxed at a valuation of 550k.
A primarily agricultural state with 102 counties and yet 2 counties run the show. Bankruptcy and bailout coming soon.
One thing is certain -
"Da Bears still suck, Da Bears still suck,,,"
There's always next year.....
Oh, wait, that's the Cubs
Chicago? that is one heck of a lot of refuse
It's so easy to make promises, but it's hell keeping them. The old 1938 book (The Promises Men Live By) stated that so well, but economic courses all but ignored it. There's no large profits in keeping promises. Except one day someone won't accept any more promises. That's how depressions start.
No, the real reason is that if Chicago citizens(==voters) were stupid/greedy/corrupt/inept/gullible enough to let Chicago become what it is(==not prevent Chicago from becoming what it is), the potential for profit is not worth the risk because they'll just default and tell the unsecured creditors to go pound sand.
Of course - poetic justice - in the run-up to and process of default, the city's noble leadership and all its friends will make off like bandits (and the plebs will do nothing but whine). Democracy succeeds again.