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PIMCO "Sees Long-Term Value" In Chicago's "Junk" Ahead Of Key Court Ruling
Back in May, the Illinois Supreme Court set a de facto precedent for lawmakers across the country when a bid to cut pension benefits was struck down in a unanimous ruling. Anyone who might have been confused as to the significance of the decision got a wake up call from Moody’s when the ratings agency, citing the read-through for Chicago’s fiscal situation, downgraded the city to junk.
As we noted at the time, Moody’s decision was bad news for a number of reasons, not the least of which was the fact that mayor Rahm 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. The ratings agency’s actions also gave creditors accelerated payment rights, meaning the city could have been on the hook for some $2.2 billion in principal and interest on its outstanding liabilities.
But the larger story revolves around the implications for other fiscally challenged state and local governments, and as we noted in "States Turn To Pension Ponzi To Plug Funding Gaps," one "solution" is to issue pension-obligation bonds, in what amounts to a nightmarish delay-and-pray scheme that’s virtually assured to end in still larger deficits. Meanwhile, Moody’s has found that using realistic return assumptions to calculate pension liabilities - as opposed to the absurd practice of accepting the assumptions of the pension funds themselves - makes lawmakers angry which is why some officials are now "omitting" Moody’s from deals. "We wanted a fresh set of eyes," one financial officer told WSJ last month referring to the decision to not hire Moody’s. "Yes, a 'fresh set of eyes,' and preferably a set that will not take a realistic look at pension fund return assumptions," we quipped at the time.
Make no mistake, this is no trivial debate. Almost half of US states face funding gaps for the upcoming fiscal year and the total pension shortfall across states and cities is anywhere between $1.5 trillion and $2.4 trillion depending on who you ask. Against this backdrop, a judge is set to rule on Friday on Chicago’s 2014 pension reform law.
From the Illinois Policy Institute:
A Cook County judge is expected to rule Friday on the legality of a 2014 pension law aimed at reforming two of Chicago’s underfunded city retirement systems. While the pension law included some much-needed reforms, such as an increase in the retirement age, if upheld the law ultimately would put Chicago residents on the hook for millions of dollars of tax increases.
Here are some facts about the 2014 Chicago pension law at issue in Friday’s ruling:
- The 2014 Chicago pension law only affects two of the city’s retirement funds: the municipal workers’ and laborers’ pension systems.
- The pension funds for police, firefighters, teachers, parks and transit workers are untouched by this law.
- The municipal workers’ pension fund has just 41 cents in the bank for every $1 that has been promised in retirement benefits.
- The laborers’ pension fund has just 64 cents in the bank for every $1 that has been promised in retirement benefits.
- The pension debt from the two pension systems affected by the 2014 law represents just $8.3 billion in pension debt.
- In total, Chicago residents are on the hook for more than $34 billion in pension debt, or roughly $33,000 per household.
And while the outlook is most assuredly not good, some say the 8% Chicago recently paid on a taxable bond offering is more than enough to compensate for the risk. Here’s Bloomberg with more on who’s backing up the truck for Chicago’s "junk":
As Chicago wrestles with rising pension costs, cash-strapped schools and a swelling budget deficit, investors from Pacific Investment Management Co. to Wells Capital Management say they aren’t counting the Windy City out.
Wells Capital is increasing its exposure to the junk-rated metropolis, while Pimco said this week it sees long-term value in the city’s debt. A longer-term perspective may come in handy, with a judge to rule Friday on the legality of an overhaul of two of four city employee-pension programs.
The nation’s third-most populous city had to pay yields approaching 8 percent as part of a $743 million taxable-bond offering last week, putting it in the league of junk issuers such as telephone company CenturyLink Inc. A $346 million tax-exempt portion of the sale yielded as much as 5.7 percent.
Already the worst-rated major city except Detroit, Chicago risks being downgraded again if the pension changes are overturned. Yields on Chicago debt are close to the highs reached after Moody’s Investors Service cut the city’s credit rating to below investment grade in May.
"Despite the fact that we all know that they have their problems, and Chicago politics and Illinois politics are really, really difficult, it’s hard to ignore that kind of embedded yields," said Jim Colby, chief municipal strategist at Van Eck Global, which bought some of Chicago’s tax-exempt deal last week. "I know the risks."
Yes, Jim "knows the risks", so stop asking him about it. Of course that’s probably what quite a few folks who went yield chasing in HY energy said earlier this year and we’ve seen how that’s worked out.
But even if Jim knows, others might not, so Bloomberg, just what are the risks?
The pension system in Chicago is $20 billion short, and the state of Illinois’s retirement fund has a $111 billion shortfall. Chicago’s retirement system is only 36 percent funded as of December 2014, compared to 61 percent in 2005.
A partial solution was found last year when state lawmakers approved a plan, touted by Mayor Rahm Emanuel’s administration, that restructured the pensions of the laborers and municipal workers. That affects about 60,000 workers. The fix forces employees to pay more with lower benefits while also boosting the city’s contribution. Some unions sued to block the law that went into effect Jan. 1.
Friday’s ruling will decide whether that law is constitutional.
Got it. Ok, so let’s just say, for argument’s sake, that the ruling goes against Chicago, what kind of chance do they have on appeal?
The decision is expected to be appealed to the state Supreme Court, which in May unanimously ruled that Illinois couldn’t cut retiree benefits. "Seeing how the state supreme court ruled earlier in the spring, I don’t expect the decision to go favorably for Chicago," said Joseph Gankiewicz, an analyst at Blackrock Inc. in Princeton, New Jersey.
Ok, but let’s ask Chicago’s lawyers - maybe they can tell us why there’s still hope even in the event things don’t go well in the courts.
If the law is overturned, Chicago’s pensions will be broke in about 10 years, the city’s lawyers have argued.
Obviously the city's legal team has an incentive to make the situation seem especially dire in order to raise the stakes of a negative ruling, but that said, Chicago's fiscal problems aren't set to go away any time soon even under an optimistic scenario. "The city is projecting a budget shortfall of $430 million next year, up from $297 million this year," Bloomberg notes. Indeed, potential investors may want to think long and hard before throwing good money after bad here and on that note, we'll close with the following graph from May which gives you an idea of where things are headed in the windy city.
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Buy the insured.
There are discounted death put bonds with insurance.
There is value in the name, you have to look for it.
Go for it Pimpco. Bet the farm on Chitown.
I double dog dare you;)
Gamblers gotta gamble.....just glad they're not gambling with my fiatscos.
not gambling ....with a Crook County judge all outcomes are predetermined.
Pimco should see value in the fact that they no longer have a highly visible loon as their front man.
I will be shocked, SHOCKED I tell you when Obama announces the bailout of his pals back in Chicago. Some excuse will be made. PIMP-CO will be paid handsomely for having the fortitude to invest in the city and take 100 cents on the dollar funded by taxpayers.
I mean we can't let these poor people go broke. It is not their fault the pensions went tits up.
At least that is the shit they will blab about anyway. Oh and nobody will be penalized that had anything to do with creating this mess.
Seen this play out before.
Chicago's pension fund administrators simply need to invest in Chicago's junk bonds, the "long term value" will bail them out, problem solved! No you say? Well, it works for the Fed. & the Treasury Dept.
"Long term value" like 2050
It should be a requirement that you have to live in Chicago to collect your pension, that way 'they' can pay for their own pension...
PIMCO had better be careful since GS won't like them working their personal hustle.....
I am really enjoying the Chicago debt death spiral play out. All brought to the citizens of this utopian nightmare who stupidly voted for corrupt one party rule decade after decade. They will be the next Detroit, only a matter of time as eventually you run out of other peoples money and the road you have been kicking that can down suddenly runs out of blacktop.
Don't take to much enjoyment out of it, it will be your money that bails these turds out.
Detroit #2, they ARE taking same sell bonds and prey route. OPM does run out when spent at such blistering pace.
Federal Bail out/in also true, TBTF.
seeing "long-term value in chicago's junk debt" = taking a bet on obama steppping-in & bailing-out his hometown with digital-dollars created out of thin air.
i've been reading that puerto rico officials are courting treasury secretary lew to step-in and orchistrate a bail-out of their debt-laden island. im guessing only a matter of time before that announcement hits the tape so the dems can seal-off another voting block going forward.
gonna be a messy fucking day when the real world connects to this monopoly-board, fantasy we've been living in.
Long term value in Chicago's junk bonds but gold is worthless...
The smart people will leave...and all that will be left will be the FSA.....and then it dies...vacant housing...no one paying taxes...everyone working for the government....Socialism does not work..
A new Era of Drexel grassroots and junk bond kingpins.
Talking up Chicago bonds = trying to sell Chicago bonds without crashing the price.
Fiduciary and servicer risk
https://www.bis.org/bcbs/publ/d332.htm
Is this joos helping joos?
Rahm has a big problem in that Chicago has a shrinking population. Employable citizens with private sector skills have the mobility to leave. So Rahm's next move will be issuing passports to Chicago's residents. Rahm will be in charge of approving permits to any Chicagoans seeking to move from his Socialist Utopia. Said approval won't be forthcoming for any cash cow—er, I mean non-Free Stuff Army citizen—to move away from Chicago.
I got the hell out after moving there only to find out that all of my firearms are considered dangerous 'assault weapons'. I live in NW Indiana now, and there is talk that Chicago is going to institute a commuter tax for anyone that works in the city and lives in a surrounding suburb. I will quit my job immediately if that happens, and so many others will too, accelerating the population loss that is already happening in the most corrupt city in the good ol USA...
<<Meanwhile, Moody’s has found that using realistic return assumptions to calculate pension liabilities - as opposed to the absurd practice of accepting the assumptions of the pension funds themselves - makes lawmakers angry which is why some officials are now "omitting" Moody’s from deals. "We wanted a fresh set of eyes," one financial officer told WSJ last month referring to the decision to not hire Moody’s. "Yes, a 'fresh set of eyes,' and preferably a set that will not take a realistic look at pension fund return assumptions," we quipped at the time.>>
So one of the lapdog ratings agencies actually tries to do its job for once and this is the result. Remind me again of why anyone thought it was a good idea for a ratings agency to be hired BY the corps they're supposed to be rating? No wonder the ratings agencies are so toothless now, and why 'nobody saw it coming' during the '08 Panic -- which will be the same excuse they'll make this time around.
Why are these ratings agencies still even in business anymore? Especially when it comes to sovereign debt. Recall the US suit against -- was it Moody's, again? -- the last time a lapdog rating agency dared to give even a nod to reality, and downgraded the US rating to AA, or A-, or something that was still far too high. Never mind, I know, it's because 'markets' are now based entirely on fraud, making accounting and underwriting into racketeers' tools.
<<And while the outlook is most assuredly not good, some say the 8% Chicago recently paid on a taxable bond offering is more than enough to compensate for the risk.>>
Wait, 8% now reflects a high level of risk? But, I thought pension plans tend to ASSUME an 8% return -- over an average of a few decades -- from a basket of investments in bond & equity markets, based on conservative assumptions. Which would suggest that pension plans consider 8% 'conservative', and not reflective of a high level of risk.
So, fund managers, consider this: Either 8% is a high level of risk, in which case many pension plans must revisit their assumptions and rework ALL their plans, pronto, to base them on genuinely conservative assumptions, which in turn would reveal how mispriced these bonds are -- OR 8% is 'conservative', in which case Chicago's interest rate should be much higher. (Actually, trick choice, both are true: many pension plans have gotten away with assumptions that are completely stupid, for decades; AND Chicago's interest rate should be much higher to reflect a high level of risk.) 8% can't be "conservative" in one case and simultaneously "higher yield reflects higher risk" in the other.
No wonder pensions are bankrupting city after city, throughout North America. We're past the point of 'future bankruptcy', and now at the stage where they're just doing everything possible to avoid calling it what it is. This Depression has made clowns of economists and now it's making clowns of underwriters as well.
Where things are headed??
They're already there but the answer is heading for the shitter!!
Summary of the article could be: "This is how Zion plunders and buys the sovereignty of the states, their complicity in Zion's tyranny as well, with their grifting banksters' fiat-debt."
The banksters print it. The streeters leverage it up and then loan it to the states. The states then up their plunder and tyranny of the people to service the debt and usury.
Eventually Zion will "bail-out" the states with more printed fiat-debt, but only at the cost of the states' remaining sovereignty, and more tyranny.
Liberty is a demand. Tyranny is submission..
"How did I end up a tool of Zion? Well, slowly at first, then all of a sudden."
The other issue is income tax. None of these pensionsers pay state income tax. If they did, a large portion of what Illinois is facing financially would help. While this would not help Chicago, the state could help the city with a bailout of the Chicago Public Schools Pensions because they city pays their own, while the State of Illinois pays the pensions for the rest of the 354,000 retired teachers in Illinois. But, to change that would require a constitutional amendment and the Dems would never got for that.