STUMP » Articles » Weekend Roundup: Chicago, Greece, Portugal, and much more » 18 July 2015, 13:44

Thanks to my referrers!

• Wirepoints and especially this post from Mark Glennon
• Mish’s Global Economic Trend Analysis and this post pointing to Chicago/Illinois stuff
• Pension Tsunami from Jack Dean, your one-stop shop for all things public pension-y
• The Other McCain, where wombat-socho has a daily blog link roundup
• Pension 360 from Ted Ballantine where somebody hit an old post on the 80% pension funding myth
  (hey, it counts)

I’m kinda beat from this last week, so I’m puking out links that I think are important.

CHICAGO IS…NOT MY KINDA TOWN

and neither is its county, Cook County, my kinda county.

From Mark Glennon at Wirepoints, we have a look at the black hole of Cook County:

Make no mistake about where the additional one percent Cook County sales tax will go, along with much more — into its pension. Ninety percent of it will go initially into the pension, according to Cook County Board President Toni Preckwinkle, with that portion decreasing later. But will it?

The pension’s actuary just released its annual valuation report for the year ended in December. That document should be a key item informing voters and county board members about the vote on the tax increase: How much will it accomplish? What’s really going on with that pension?

I’ll provide here some of the basic headlines from the report, which are important, but first there’s a bigger, broader lesson that’s more important, and this is a good opportunity to learn it. Actuary reports are gobbledygook. Few people beyond pension actuaries can extract from them anything much that’s useful. Reporters cannot be expected to understand them, which is probably why you’ve seen nothing written about this new report. Browse through the report yourself: It’s opaque and obvious questions go unanswered. Go ahead. Look at it. I’m confident that even those among you with financial training will pull your hair out.

Go to Mark’s post to get the links.

I tried looking at the report, and can’t do anything with it right now.

Mish covered the Chicago/Illinois crack up in his own way:

Illinois has ….

The second-highest property taxes nationwide.
The fourth-highest workers’ compensation costs in the country.
The ninth-highest regulatory burden in the U.S.
The ninth-highest overall tax burden nationwide.
Forced unionism.

Progressives have been angling for a massive income tax hike.

The “glory” does not stop there.

Please note that Illinois has the most units of local government of any state in the country. According to the U.S. Census Bureau, with 6,963 local governments, Illinois beats its nearest competitor by more than 1,800. Texas is No. 2 with 5,147 local governments.

I don’t feel so bad for living in New York and working in Connecticut now.

Lots more in Mish’s post

Incredibly high interest rates on Chicago bonds

The city of Chicago has been battling a financial crisis since mid-May when a state court rejected its fix for its underfunded pension plan and Moody’s downgraded its debt to junk status.

As part of the larger solution to the financial chaos that downgrade unleashed, the city is issuing $1.1 billion in bonds, both taxable and tax-free. The cash raised will reduce its reliance on short-term debt to pay its bills.

Those new bonds priced Thursday and Friday at rates that have surprised some municipal bond investors, who find them very attractive.

A taxable issue (the city had to issue taxable bonds since the money isn’t technically going towards a public good) that is maturing in 2042 priced Thursday with a yield of 7.98%.

The tax-free issue maturing in 2039 priced Thursday at 5.69%. For an investor in the highest federal tax bracket, that’s equivalent to a 9% taxable yield.

Holy shit. That’s incredibly high.

So I don’t give you contextless numbers, the current 30-year Treasury is 3.11%. 30-year munis are only a little higher, at 3.38%.

Whether that’s taxable or tax-free, the Chicago bond yields are incredibly high.

I think bond investors need to think really, really hard about how desperate for yield they are. Because they can get wiped out via bankruptcy. Even though there is a current legal barrier to formal bankruptcy, I wouldn’t assume that legal barrier will hold.

EUROZONE FOLLIES

A few comments on the passing scene.

First, this piece by James Poulos claims a bunch of outside pundits want Greeks to revolt against austerity, etc.

I can only speak for myself, but it’s not that I want rebellion, but that I expect it. There are lots of things that I want, but I’m not so foolish as to think that anybody but my own family cares about what I want (and they certainly don’t care what I want to happen in Greece.)

I try to write about what I think will happen, not what I think should happen. Plenty of people already staking out the corner of “should”.

I prefer reality to my dreams of my personal utopia.

INTERLUDE TIME

I will write more about this later, but I got a nifty email recently from the people at The Good Judgment Project:

It’s official. You have qualified as a superforecaster.

We know it’s been tough to wait for GJP to finish processing all of the Season 4 data, but we’ve finally finished that task. Your impressive performance in Season 4 put you among the top forecasters in your cohort. (As previously explained, we choose superforecasters by identifying the top performers in each experimental condition, rather than by an across-the-board comparison of scores, because differences in how we treated the experimental groups create systematic differences in overall group performance that make comparisons between forecasters in different experimental conditions hard to interpret.)

CONGRATULATIONS!

I wouldn’t be too impressed by my result, btw. The specific forecasts I got really, really wrong involved Greece.

But still.

If you’re interested in being involved in the next forecasting competition, you can sign up here. I had a lot of fun in the last one.

BACK TO THE EURO-MESS

Greece is not the only country having issues in the eurozone. Consider Portugal:

In the 15 months since Portugal took the last installment of its €78 billion ($85 billion) bailout loan, the economy is growing again, unemployment is falling and the government can easily tap markets for financing. On Friday, it announced it would auction up to €1.25 billion in bonds on July 22.

German Finance Minister Wolfgang Schäuble has called this outcome the best proof that an austerity program including budget cuts and tax increases—imposed on Greece as well as Portugal in exchange for bailout cash—can work. Portugal’s Prime Minister Pedro Passos Coelho said on Tuesday that without it, his country could have ended up like Greece, at risk of a default and a traumatic exit from the eurozone.

….
the country’s gross domestic product, up from 27% in 2009, aided by more-flexible labor laws Portugal introduced under the bailout program to make its products more competitive. The economy grew 0.9% in 2014, after shrinking more than 6% between 2011 and 2013.

But the benefits have yet to reach many of Portugal’s 10 million people, many of whom question whether years of belt-tightening were worth it.

Ms. Gomes took a hit when the value-added sales tax on restaurants was raised to 23% from 13% in 2012, the first full year of the austerity plan overseen by the European Union and International Monetary Fund.

…..
Her plight is widespread. The European Commission, which is the EU’s executive arm, estimates that 60% of Portugal’s hotels and restaurants face a high risk of closing because revenue isn’t covering debt repayments.

While the unemployment rate has dropped to 14%, from a peak of 17%, it is still three points higher than pre-bailout levels. It also doesn’t count the 200,000 or so people who the Portuguese statistics agency says have left Portugal permanently since 2011, many in search of work.

…..
Here in Viana do Castelo, home to 87,000 people on the country’s northern coast, companies that made metal bridges for highways at home now sell their services in former colonies Brazil, Angola and Mozambique.

But José Maria Costa, the mayor, said dozens of companies, large and small, have shut down. He had to cut public-employee salaries by more than 15% and reduce sports and cultural programs.

To soften the blow, he set up two food centers that offer free lunch and dinner to people in need. More than half of the town’s 4,000 school children get subsidies to cover food and transport costs, he said.

Have some graphs.

BACK TO GREECE

Mish on the situation:

Question of Haircuts

Schäuble’s position, and that of the German constitution, is there can be no haircuts within the eurozone.

No one of any importance really cares about the German constitution or logical assumptions on debt sustainability.

Merkel will ram through the bailout package, oblivious to Schäuble’s objections, and also oblivious to the IMF position that Greek debt is not remotely sustainable and haircuts are needed.

For details on the IMF’s position, please see White Knight Irony: IMF Threatens to Walk Away From Bailout Deal Citing Unsustainable Debt.

Will the IMF do what they threaten?

Good question, but so far no one but Germany has done what they threatened.

Again, to rebut Poulos: I do not want the Greeks to revolt. But there are actual, violent protests.

I am not pretending to know what actually will happen in Greece. Perhaps the Greeks will meekly take the reforms, but it doesn’t seem the Portuguese really are, and they are at a lower visibility level in the U.S. news right now.

WATCH THIS SPACE

I don’t have particular plans right now, but I do have a bunch of posts in draft mode, some just waiting for clean-up, and others waiting to see if there’s further developments.

It does seem like multiple Presidential candidates have public pensions connections — certainly most of the candidates who are or have been governors do — and I need to do a rundown of these.

I will leave the coverage of New Jersey’s Chris Christie to John Bury, who has thoroughly covered the issue of NJ pensions. I don’t think I can add anything on top of what Bury has to say. He’s actually a pension actuary, and I’m not.

Also, he lives in NJ, so he has a direct interest in the issue.

I don’t know if public pensions will become a huge presidential issue in the 2016, but I think it should.

Let’s find out if my wishes and what happens align.