STUMP » Articles » Chicago Update: Pensions, Taxes, and Bonds » 9 August 2016, 06:37

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Chicago Update: Pensions, Taxes, and Bonds  


9 August 2016, 06:37

Not even an OH MY.

No, not that one.

Yes, that one.


I can’t even with the Chicago Public Schools finances.

CPS will continue to rely on borrowing as it prepares to release 2017 budgets

Months after Chicago Public Schools officials said a dire budget outlook had all but barred the district from the capital markets, the school system is re-engaging lenders to finance construction projects and bolster cash flow.

The district plans to unveil its 2017 operating and capital budgets this week. CPS has said it will balance its operating budget with help from state measures that include the authority to generate $250 million in new property tax revenue.

The district, which has a debt load of nearly $7 billion, also will continue to rely heavily on borrowing. In addition to $150 million in bonds the district sold on the private market last week to fund construction projects and other expenses, CPS also plans to leverage $45 million from a recently enacted property tax levy to borrow hundreds of millions of dollars for additional school construction projects.

Chicago Board of Education President Frank Clark briefed investors on CPS finances Wednesday behind closed doors at the Symphony Center as the district attempts to stabilize its standing with credit rating agencies.

After the state passed a school funding measure in June, CPS said it still had to cover a $300 million budget shortfall. There also is continuing uncertainty over a teachers’ contract that is still being negotiated.

In addition to the money from the property tax approved by the state, CPS expects to get about $131 million more in state funding. Another $215 million in state assistance is dependent on consensus on pension reforms by the legislature and Gov. Bruce Rauner.

The district has not provided an official statement on the latest bond sale, a document that clarifies vital details about such deals and updates the district’s financial picture. CPS, citing an agreement with J.P. Morgan, said more public information would arrive by September.

The district declined to comment on its agreement with the bank. A copy of that agreement was obtained by the Tribune.

The bonds mature in 2045 and bear interest at an annual rate of 6.5 percent, according to disclosure filings.

Should Standard & Poor’s or the Fitch ratings service drop the district’s credit rating deeper into junk territory by Sept. 2, CPS’ annual interest rate could increase by a half-percentage point up to a “maximum rate” the district would not identify.

CPS sold the bonds last week at initial yields of 7.25 percent, an improvement from the $725 million debt sold in February at initial yields of 8.5 percent, but still far more expensive than typical government borrowing deals.

S&P, which downgraded the Board of Education’s debt by two notches in January, said much of the state funding amounts to “one-time revenue.” The agency said it will maintain a negative outlook on the district’s credit at least until it sees the new budget.

Ciccarone was doubtful a severe downgrade of the district’s credit is likely. Even if a substantial downgrade triggered a higher base interest rate on the bonds, he said, the additional pressure wouldn’t be too severe on a $150 million loan.

“We still have cash flow issues, we still have parts of that stopgap budget that are based on conditions,” Ciccarone said.

Okay, borrowing for capital projects is not so bad.

But borrowing long-term for “cash flow” is a very bad sign. Sure, they say they will get short-term paper for the cash flow situation, but we don’t have any info here.

It seems to me that CPS and even bondholders think there’s going to be some sort of federal bailout. All of those taxes I talked about on Friday were for other Chicago pensions, not CPS pensions. And that’s where they’ve got a huge hole.


Speaking of taxes, the Chicago Aldermen (aka town council members) are wringing their hands over the taxes.

Here’s one unsympathetic editorial board:

Editorial: Chicago aldermen created this mess. Now they dislike Emanuel’s proposed fixes.

Nice work if you can get it. Nice and cowardly and irresponsible:

You’re a Chicago alderman. Year after year you voted to approve Mayor Richard M. Daley’s budgets — as if City Hall was spending no more than it would collect in revenue. Or, if you joined the City Council after Daley’s departure, you didn’t ask rude questions such as, “How did we get so broke?” You kept quiet. You went along.

You and yours didn’t confess to voters that the council and the mayor knowingly had underfunded workers’ pensions by many billions of dollars — a debt sure to come due. You held your breath. In the short term, almost nobody noticed. And in the long term, you blithely assumed, city revenue would just keep rising. And there would never be another serious recession. And some future mayor’s brainiacs would conjure a magic trick to erase all this debt. And remember what your predecessors told you: Somehow, we’ve always made it work. Heh.

But now the roof of City Hall is collapsing on you. The national recession that ended in June 2009 still won’t quit in your ward. City debt — taxpayer debt, really — is measured in tens of billions and rising. Chicago has the bond market spooked. And Mayor Rahm Emanuel has no magic to keep the pension funds from going bust. So he’s asking you for yet another vote to raise a tax, this time on water and sewer bills. Let’s be honest, it’s a property tax hike by another name.

And you? Because you’re an alderman in denial of the mess you’ve made — your budget votes or your pension-pretend or both — you want a pain-free solution. You always do. Because your constituents are wide awake and their tax burden has them in a fury. They’re catching on to what you’ve done to them. So this time:

You want a progressive income tax to squeeze the millionaires (which, in fact, would require a state constitutional amendment). Or maybe a financial transactions tax (which state government would have to approve). Or a tax on commuters (again, Springfield). Or a sales tax hike (to go atop the biggest sales tax of any big U.S. city, and thank you too, Cook County Board President Toni Preckwinkle, for pushing it to 10.25 percent).

Sure, if you wanted to, you could slash spending and outsource all sorts of operations to more economical private-sector companies. Except slashing spending is as foreign to you as whatever language the locals speak in Uzbekistan. It’s just not done here. Besides, if you propose consolidating and streamlining and, yes, outsourcing, the unions that bring you money and muscle and votes will make your life a horror.

But wait, you have one escape route. You can suggest a real alternative to this tax increase — some way to raise not chump change, but billions of dollars to feed the pension monster that is eating Chicago.

You have a better idea than Emanuel’s proposed tax hike? Let’s hear it now.

Otherwise, apologize to your constituents for the pension crisis. Then suck it up and vote.

I don’t see why they need to apologize to the constituents.

The constituents have been in on the deal as well.

They wanted NY-style big government without the expense. This is exposed via what is term “revealed preferences.” Many of the residents came from somewhere outside Chicago and even Illinois, so they chose to be there. Chicago is first in population loss of cities, so people know how to leave.

Well, the bills have come due.

Remind you of anything?



It’s amazing how journalists can see the obvious years after it occurred.

Fran Spielman points out Rahm’s problems came from Daley:

Analysis: If only Daley hadn’t punted pension crisis to Emanuel

Eight years ago, then-Mayor Richard M. Daley created a 32-member commission drawn from labor, business and banking to confront a problem that threatened to choke future generations of Chicago taxpayers: underfunded city employee pension funds.

Daley said then that the comprehensive solution he was seeking could include everything from benefit reductions and increased employee contributions to a higher retirement age and a shift away from “defined benefit” pension plans and toward the “defined contributions” or 401(k) plans favored by private industry.

“I hope it’s controversial. It has to be. If it’s not controversial, then it’s not worth anything. A lot of people will not be happy,” Daley said then.

It wasn’t controversial. Daley wouldn’t let it be controversial. Instead, it turned out to be an exercise in political avoidance.

After two years of study, the commission concluded that reduced employee benefits, higher worker contributions and “new revenue” would be needed to bail out four city employee pension funds then due to run out of money by 2030.

But there were no specific recommendations about what revenues to raise. Just a definition of the gaping need.

To reach a 90 percent ratio over 50 years — assuming annual investment returns of 8 percent — would then have required $710 million more each year. Sixty percent of that would have come from taxpayers, 40 percent from city employees.

Without benefit reductions, it would have required the equivalent of a 52 percent increase in the city’s property tax levy and 8 percent more from city employees. With benefit reductions, the annual gap could be reduced to $510 million, the report stated.

Daley responded by declaring that Chicago taxpayers could not afford to solve the city’s pension crisis. He refused to explain how he planned to defuse the financial time bomb. Instead, he let it keep ticking.

“Taxpayers are wondering, ‘Am I on the hook?’ And I say, ‘No, you’re not on the hook.’ You’re not gonna go and ask the taxpayer for $10,000 a year for the next 10 years,” Daley said then.

I swear, people had to have known. I am too lazy to go google it, but I assume that people at the time, not just people like David Crane, could see what lies these were.

But no, the pensions would always be made good, right?


So, evidently, the current GASB valuation approaches for public pensions includes figuring future contribution patterns in the mix. You determine the full liability, then subtract out the part that will be paid in the future.

Which would be theoretically fine if it actually did get paid in the future.

Mark Glennon explains what happened with Chicago:

Emanuel Administration Using Repealed Contribution Schedules for Police and Firefighter Pension Numbers – WP Original

In picking which decepton to write about in the City of Chicago’s PR offensive last week about the its finances, I’m suffering from the “paradox of choice.” That’s what occurs when you’re overloaded with too many choices, making it difficult to decide.

I’ll go with this one for now — the numbers for Chicago’s police and firefighter pensions. Had it been honest, the city would have prefaced its pension numbers by saying, “Let’s assume we didn’t kick the can and that an old law is in effect.”

The pension numbers the city used are built on the assumption that it will make far faster, higher pension contributions than in fact it will make under a new law. Its numbers, in other words, ignore a huge can-kick the General Assembly recently passed. The numbers the city peddled therefore are worthless.

Recall what happened earlier this year. The faster, higher pension contribution set by state law six years ago was too much for the city to handle. So, Emanuel strongly supported SB777, a bill sponsored by Senate President John Cullerton and other Chicago legislators to extend and lower city contributions to the two pensions. Governor Rauner vetoed it when it passed, calling it a can-kick, which it unquestionably was. But the legislature overrode his veto and the bill became law in May (Public Act 99-0506).

The new law reduces the city’s required payments to the pensions by about $1 billion over the next five years and extends the timeline for reaching a 90 percent funding level from 2040 to 2055.

Emanuel had earlier blasted Rauner for vetoing the legislation, saying it would have forced a huge tax hike — much larger than we’ve already seen or that is now in the pipeline.

The problem is that the actuarial reports recently completed, on which the city bases its published numbers, assume the old law is still in place! They clearly state that. You can see for yourself in the report for the police report linked here. (You have to look at the “GASB 67 and 68 reports,” in which the all-important Net Pension Liability is calculated, which are the numbers the city used in its financial report widely reported last week. You may also recall that these are reports I had to get through a Freedom of Information Act request. The police pension finally posted theirs last week. The firefighter pension still has not.)

Below is a comparison done by the Civic Federation of the old contribution used by the actuary and the city compared to the new, easier one passed into law in May. The blue is the new, lower contribution schedule. The yellow and red is the old schedule, as calculated in earlier actuarial reports.

Here’s a comparison graph from the Civic Federation:

Let me do some quick calcs — I will be “nice” and compare the lower 2013 projections against the SB777 numbers.

2016: 26% reduction
2017: 22% reduction
2018: 19% reduction
2019: 14% reduction
2020: 14% reduction

The reduction using the 2014 numbers are even larger.

It’s not the actuaries’ fault that the “wrong” contribution schedules were used. How were they to know ahead of time what the political decisionmakers would do?

That said, if the projected cash flows – benefit projections, asset projections, contribution projections – were split out, then pretty much anybody could adjust and see the effects of lower contribution projections.

Or lower discount rates.

But that’s for another time.

Sure, let’s go with that one.

Compilation of Chicago posts.

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