STUMP » Articles » Watch It Unwind: Chicago, Greece, and Asset-Grabbing » 21 April 2015, 05:52

First, let’s go to Mark Glennon at Wirepoints on today’s funtime

There’s no point in sugarcoating this. The financial crisis at the Chicago Public School District may come to a head this week, and the impact will extend beyond the school system. A CPS bond sale is scheduled for Tuesday, which is widely seen by financial markets as a test of whether it has a pulse. Here is a summary of key points from various sources:

• CPS is just about out of cash, and its cash could be entirely wiped out on 48-hour notice, according to the Sun-Times. Specifically, the banks owed on $228 million of swap agreements have the right to demand it with that two-day notice, which would just about deplete CPS’s cash reserves, unless a negotiated settlement is reached.

• CPS’ structural deficit is horrendous and ongoing. In its most recently reported year, it had a loss in net position of over $1.1 billion with an operating fund deficit of $513 million, and that’s on just $5.4 billion in total revenue. In addition, its pension’s unfunded liability grew by over $100 million in the last reported period, despite higher employer contributions and good market returns. Its unfunded liability stands at $5.5 billion and it’s 53% funded.

• It’s current budget is a gimmick-based monstrosity. The Civic Federation details why, here.

• The resignation of CPS’s CEO and related Federal investigation aren’t a just-another-day-in Chicago story. They’ve brought the overall management and control system of CPS into question, and the Federal investigation is deeper than first reported. ABC7 says it has “a gush of details in federal subpoenas served this week on top Chicago Public Schools officials,” and that the three of the CEO’s top lieutenants have been joined under scrutiny. “How could they be so dumb,” asked a Crain’s headline.

• “Rating shopping” seems indicated, which is a very bad sign. Bond issuers typically line up major rating agencies ahead of a bond sale. This sale was rescheduled from last month, after both Moody’s and S&P downgraded CPS to a notch above junk. Ahead of the new sale,” according to The Bond Buyer, CPS “did not seek a rating from Moody’s. It sought fresh reviews from Fitch Ratings and Standard & Poor’s and a new rating from Kroll Bond Rating Agency.”

• Much attention has been given to Governor Rauner’s comment that he’s “concerned that [CPS] is going to have to go bankrupt.” Duh, you might be thinking, but some in the media have reported that as a dangerous endorsement of bankruptcy for CPS, so the concern about a Chapter 9 bankruptcy is real — though legislative authorization from Springfield would be needed for that.

Go through to the post for all the links and further comment. If you’re interested on the bond-rating angle, consider this from Mish:

Bond Rating Cuts

On March 9, Moody’s dropped Chicago School bonds two notches to Baa3, that last rank above Junk.

Chicago responded by dumping Moody’s in favor of little-known rating agency Kroll, essentially shopping around for better results.

This is the way the system works. Ratings agencies lose business if they do not rate bonds high enough.

On March 20, Fitch downgraded Chicago Board of Education Rating to BBB-, also one step above junk.

But back to the Wirepoints piece: Mark Glennon also quotes a private email he received. It touches on one point I made before: the dwindling Chicago population.

That’s rate of change, not the population itself. If you want to see a graph of Chicago population:

Those swaps are going to be a real problem. Trying to provide operating cash flow by issuing bonds are a really bad problem.

Bond sales are a bit different from sales of equity, so it may be a little bit before we see the full sequence of events on this one.

But now let us jump to Greece.

I’ve been following the brinkmanship going on between the IMF, Greece, and EU, and, well… this is not a good sign:

Earlier today, following weeks of speculation, Greece finally launched the first shot across the bow of capital controls, when it decreed that due to an “extremely urgent and unforeseen need” (ironically the need was quite foreseen since about 2010, but that is a different story), it would be “obliged” to transfer – as in confiscate – “idle cash reserves” located across the country’s local governments (i.e., various cities and municipalities) to the Greek central bank.

Uh, yeah.

Luckily, Chicago does not have control over the banks (yet).

But I can think of all sorts of big piles of cash they have some control over that they may want to tap.

Oh look, a RFI for infrastructure-related manager:

Chicago Public School Teachers’ Pension & Retirement Fund issued an RFI for infrastructure investment managers focused on infrastructure investments in the Chicago area.

The $10.4 billion pension fund has a 3% infrastructure target allocation, including 2.3%, or $240 million, invested, according to minutes of its Jan. 29 board of trustees meeting.

The RFI doesn’t give a target allocation for Chicago-area infrastructure investments. “No contract will result” from the RFI, the document states.

“There have been no decisions on infrastructure managers,” Frances Radencic, the pension fund’s director of member and office services, said in an e-mail. “The RFI is simply an information-gathering effort to determine if there is a sufficient pool of investment managers to move forward. … If and when the trustees approve, there will be a formal RFP process.”

Now, who is in charge of making infrastructure improvements, etc.?

Can we say…. the Chicago and Illinois governments?

I think the members of the Chicago pension funds really need to think about what the pension trustees are doing with the money backing the pensions. I keep hearing happy talk about Chicago public workers benefits from local investment in their community… but you know, the government is taking money promised to government workers to pay for government capital projects. There’s something that sounds a bit off to me about that.

Kind of like having your own company’s stock in your 401(k).

I knew people who had worked at AIG, before that fell apart. They had a lot of AIG stock both inside and outside their retirement accounts. That’s not the only such example I know of, but I think people know what happened to AIG stock.

Anyway, this sort of thing is what put me off Social Security privatization. That’s a big pot of fun money for some politician to mess with. There are already yakkers who want to try to grab people’s private accounts. And though I’ve noticed that said people have had to publicly back off this stuff, there have been countries that have grabbed private retirement assets.

So, I’m just saying: Chicago pensioners — keep a very close eye on your pension funds. They may be used to bail out current politicians, and ruin your retirement security.

Compilation of Chicago posts.