STUMP » Articles » Chicago Watch: Congrats on your "win", Rahm... I guess » 9 April 2015, 18:14

Rahm Emanuel got re-elected mayor of Chicago in a run-off election, but it’s kind of hard to call it a win.

In a prior post, I remarked:

Anyway, Rahm, you asked for this. Maybe you’ll get lucky this time, and lose your election. Chicago is likely going to go bankrupt in fact, even if Chicago can’t declare bankruptcy without Illinois state approval.

But the Illinois state government may just be in a mood to let Chicago sink.

And I doubt Obama will be able to get a federal bailout for his ole adopted hometown.

To be sure, Detroit was showing these kinds of cracks years before it officially went bankrupt. It takes a lot of time for the credit to run out….if nobody is watching.

But people are watching.

This will be very ugly, no matter who wins the mayoral race.

Part of that remark had to do with the pension lawsuit(s) working their way through the Illinois Supreme Court, and part of the remark has to do with swaps held by the city and related entities.

Let’s see how those swaps are doing, shall we?

One of the counterparties is not interesting in altering their deal:

No Deal Yet for Chicago on Wells Fargo Swaps
BY YVETTE SHIELDS
APR 8, 2015 3:04pm ET

CHICAGO — Counterparty Wells Fargo has so far refused to lower the rating threshold for three Chicago swaps that reached termination events through recent downgrades, a market source familiar with negotiations said.

Though it hasn’t changed the threshold, Wells Fargo has not demanded, by designating an early termination date, that the city make an estimated payment of $38 million based on a recent negative mark-to-market valuation.

The bank is now allowed to do so under the automatic termination event triggered by the city’s recent downgrade from Moody’s Investors Service but is giving the city time to resolve its swaps dilemma even as it’s refused to lower the rating threshold as requested, the source said.
…..
Two additional swaps face termination triggers if the city’s GO or sales tax rating is lowered one more notch by Moody’s, including one tied to the 2003B series being reoffered. Combined, they are negatively valued at $33 million. The city bears no collateral posting obligations on any of its swaps.

Oh, that should be fun to unwind.

Sometimes I wonder why these entities are allowed to play in the swap space. I think governments need to be excluded from all sorts of financial structures, swaps being one of them.

Someone else reads the fiscal tea leaves for Chicago, finding rancid dregs:

Next Stop for Chicago: Emergency Financial Control Board
BY JOE MYSAK
Now that Rahm Emanuel has been reelected mayor of Chicago and that distraction is out of the way, we can all start thinking about the future of the city.

I’m not a betting man. If I were, I’d bet that Chicago is going to be run by an Emergency Financial Control Board, or something like it, within two years, the same as New York City back in 1975 (and until 1986).

The city is now rated Baa2 by Moody’s, one step from the basement of investment grade. In cutting the rating (“with a negative outlook’‘) in February, Moody’s said, “The negative outlook reflects our expectation that the city’s credit quality could weaken as unfunded pension liabilities grow and exert increased pressure on the city’s operating budget.’‘ Moody’s expects “substantial growth in unfunded pension liabilities even if the city’s recent pension reforms survive an ongoing legal challenge.’‘

So a cut to junk may well be in the cards, and with it diminished and eventually lack of access to capital. Chicago has already creatively used, and some would say abused, the municipal market to subsidize city operations, as Kristi Culpepper, the Kentucky official who for many years wrote as “Bond Girl,’‘ demonstrated in this recent piece, required reading, published on Tumblr.

Let’s take a look at this Kristi Culpepper piece:

How Chicago has used financial engineering to paper over its massive budget gap

Chicago made headlines at the end of February after Moody’s downgraded the city’s general obligation bond rating to Baa2. Moody’s has cut Chicago’s rating five notches in less than two years. This downgrade, however, placed the city’s credit below the termination triggers on some of its outstanding interest rate swaps. The city has been working to renegotiate the terms of those contracts with its counterparties.

If Chicago’s general obligation rating falls below investment grade, the city’s credit deterioration will become a self-fulfilling prophesy. The city risks nearly $400 million of swap termination payments and the acceleration of its $294 million of outstanding short-term debt.

Unsurprisingly, some of Chicago’s bonds are already trading at junk levels.Chicago CUSIPs are listed here.

That said, the rating agencies and most other market participants still appear to be light years away from understanding the true scope of Chicago’s financial problems. The city has a very — well, let’s just call it unconventional — approach to borrowing money and probably should not be considered investment grade.

……
Dating back to at least 2003, however, Chicago has been issuing long-term tax-exempt and taxable bonds to:

(1) Roll over short-term debt used as working capital;
(2) Pay for maintenance activities that would otherwise be paid from the Corporate Fund;
(3) Pay for judgments and settlements that would otherwise be paid from the Corporate Fund, including wage increases and retroactive pension contributions for its employees; and
(4) Provide discretionary funds to each of the city’s 50 aldermen to pay for activities in their own districts.

The magnitude of tax-exempt bond proceeds used for judgments and settlements over this period is staggering. The Chicago Tribune estimated it at approximately $400 million:

There is a lot more at the link.

In my prior figuring, Chicago can’t really cough up that amount of cash.

But look at those 1 – 4. Basically, they are using long-term debt to fund operational expenses.

(Just like pension obligation bonds, come to think of it)

That never ends well. Once the credit dries up, not only are they not going to be able to pay for their long-term obligations, they will probably not be able to cover their operations.

So, enjoy your “win” until someone else takes over the city because you can’t dig out of the hole.

I don’t really see anybody interested in filling Daley’s hole. Detroit was allowed to be whacked, so you’d better believe Chicago can easily be on the block as well.

By the way, this is what happened to New York City, back when Ford told it to drop dead:

In October 1975, with the city on the verge of bankruptcy, Mayor Beame asked the federal government for a bailout. President Gerald Ford refused, leading to the memorable New York Daily News headline: “Ford to City: Drop Dead”. As a result, Mayor Beame laid off many police officers and other city employees, which was followed by an increase in crime. (The next month, Ford relented in part, signing the New York City Seasonal Financing Act of 1975, which extended $2.3 billion in federal loans to the city for three years.⁴)

A 982-page report from the Securities and Exchange Commission blamed Beame’s mismanagement for the city’s financial mess, which his opponents seized on as an electoral issue.⁵

Mayor Beame came in third in the Democratic primary, behind Ed Koch and Mario Cuomo.

At least in Rahm’s case, he can point to Daley. But next time, he may be out on his ass, with no soft landing if Hillary Clinton doesn’t make it into the White House.

Enjoy it while it lasts, Rahm.

Compilation of Chicago posts.