The last time I touched on Chicago or Illinois finances was over a month ago.
Yes, stuff has been going on… well, kind of not going on. It is a lot to look at, so I declare this week Chicago and Illinois finances week! Party time!
But first, thanks to my linkers:
Also, howdy to the people arriving from twitter, facebook, my UConn faculty page, and whoever from the Heartland Institute, Transparent Nevada, and Liberty Christian School! I’m getting interesting visitors in my logs.
SPECIAL TYPE OF BONDS FOR CHICAGO PUBLIC SCHOOLS
Facing junk-bond status as it drowns in underfunded pension obligations, the Chicago public school system is trying to induce investors to buy its debt through an accounting scheme that will (theoretically) allow the bonds to keep paying interest even if the system goes belly-up.
Yields on ordinary debt from CPS have reached nine percent in recent months. The latest effort to market its debt reflects a new level of desperation on the part of the district, which has failed for years to put enough money aside to fund teacher pensions even though residents of the state of Illinois and the Windy City pay above-average tax burdens.
The presence of the term “hypothetical bankruptcy” in the bond prospectus also highlights the fact that the district’s policymakers have given more than idle thought to the possibility that the school system may be forced into Title IX proceedings. (There have also been rumblings about bankruptcy for the entire city).
A handful of local governments have been forced into bankruptcy in the wake of the financial downturn, including Detroit and San Bernardino. But if pension debt keeps accumulating unchecked, the next wave of bankruptcy might extend beyond post-industrial regions in persistent decline and sweep up our mightiest urban centers as well.
Note the sentence I highlighted. You will be seeing the word “theoretically” and “hypothetically” a lot in discussion as to what CPS is trying to do.
CHICAGO, Dec 8 (Reuters) – A new type of debt for the Chicago Public Schools (CPS) earned an investment-grade rating of A from Fitch Ratings on Thursday, based on the bonds’ ability to withstand a potential bankruptcy filing by the financially struggling district.
The A rating on $500 million of capital improvement tax bonds is eight steps above the junk rating of B-plus with a negative outlook Fitch has assigned the school system’s $6.8 billion of outstanding general obligation bonds.
Fitch attributed the difference to its assessment “that the pledged revenues meet the definition of ‘special revenues’ under the U.S. Bankruptcy Code and therefore, bondholders are legally insulated from any operating risk of the board.”
The United States’ third-largest public school system is struggling with pension payments that will jump to about $720 million this fiscal year from $676 million in fiscal 2016, as well as drained reserves and debt dependency. The fiscal woes have pushed its GO credit ratings deep into the junk category and led investors to demand fat yields for its debt.
The $500 million of bonds will be secured solely by a capital improvement property tax approved by the Chicago City Council last year and not by the district’s GO pledge. The property tax revenue, initially totaling $45 million, can only be used to fund capital projects and not operations, and is subject to an intercept mechanism that will send the funds directly to the bond trustee.
CPS cannot currently file for municipal bankruptcy in Illinois, although there have been proposals to change state law to allow such a move.
I’ve highlighted the key bit.
Some other coverage of these bonds:
Chicago’s public school (CPS) system plans to sell a new type of bond issue in an attempt to separate the debt from the district’s severe financial woes and protect it in a potential bankruptcy filing, according to a document released by the district on Tuesday.
The preliminary prospectus for the debt indicates the Chicago Board of Education will issue $500 million of bonds secured solely by a capital improvement property tax and not by the district’s general obligation pledge.
That pledge currently covers about $6.8 billion of existing bonds that are rated junk by Moody’s Investors Service, S&P, and Fitch Ratings.
Ratings for the new bonds, backed by a $45 million a year property tax levy approved by the Chicago City Council in 2015, were not available. Because that tax revenue can only be used to fund capital projects and not operations, CPS is hoping bondholders will consider the debt a safer bet than the district’s GO bonds.
A CPS spokeswoman could not immediately be reached for comment.
CPS cannot currently file for municipal bankruptcy in Illinois, although there have been attempts to change state law to allow such a move. The prospectus includes legal opinions on a “hypothetical bankruptcy” by CPS that conclude payments on the new bonds would not be automatically stopped by a federal bankruptcy court and that bondholders would retain a lien on the tax revenue.
The new structure offers a new ad valorem tax pledge distinct from the district’s traditional double-barreled offering of a general obligation pledge and alternate revenue source pledge.
It’s a “unique credit and security,” Ronald DeNard, senior vice president of finance, said in a recorded investor presentation. “The credit is secured by a new unencumbered limited purpose dedicated property tax levy within the school district that will be statutorily limited to capital improvement — cannot be used for operating expenses. The CIT revenues are neither a general revenue nor are they available for debt service on any of the board’s existing debt.”
The isolation of the revenues earned the bonds an A rating from Fitch. That’s eight notches above the junk level rating of B-plus Fitch assigns to the district’s GOs.
The new structure offers multiple protections aimed at quelling bondholder unease about the distressed district’s precarious finances. It includes a direct intercept that sends the tax levy revenues directly from county collectors to the bond trustee.
Excess revenues are freed up after debt service payments in the current calendar year and through the following April are set aside and the district must identify and certify what projects are to be funded with the cash. The tax revenues are statutorily limited to pay for capital or for debt service on the capital levy backed bonds.
The bonds are further secured by a trustee-held debt service reserve, funded with bond proceeds in an amount equal to 0.14 times of maximum annual debt service, which combined with CIT revenues, provides 1.35 times coverage through 2032 and then 1.24 times. Future issuance under the structure would require that a 1.1 times additional bonds coverage test be met.
“The 2016 bonds are not secured by the board’s general obligation full faith and credit pledge or any other revenues and the CIT revenues flow directly from a third party intercept structure isolating the CIT credit from the board’s general credit,” investor documents say.
The General Assembly gave the city the ability to levy the tax in 2003 but it was not approved by the City Council until October 2015 and collections began in July.
The levy can be raised based on the consumer price index but a floor is set so that it can’t be reduced in the event of deflation. The levy is expected to grow to between $200 million and $300 million through 2042 depending on the Consumer Price Index.
CHICAGO – With legal opinions endorsing the bankruptcy-remote structure of its next deal, and an A rating in hand, Chicago Public Schools’ new tax-revenue backed credit has a clear path to market access, though yield penalties will remain, market participants say.
CPS, which borrows through the Chicago Board of Education name, is expected to price its inaugural $500 million sale of dedicated capital improvement tax bonds the week of Dec. 12. Barclays and JPMorgan are senior managers with Barclays running the books.
The isolation of the funds for capital is a cornerstone of the structure that secured legal opinions from the deal’s bond counsel and underwriters’ counsel saying tax collections would meet the U.S. bankruptcy code’s definition of special revenues. Such a designation would allow for their continued flow to debt repayment in the event of a Chapter 9 filing and offers strong protection from a haircut in a confirmation plan.
The legal opinions paved the way for Fitch’s consideration of the bonds under a special revenue analysis. That resulted in the A rating that should make the district’s new debt more acceptable to investors worried about its precarious operations and dependence on a state government locked in political dysfunction that’s prevented passage of a budget.
“They have an A rating which is a massive endorsement for the structure of the deal, not the school district. They put the revenue in a lock-box and have legal opinions from two reputable law firms,” said Brian Battle, director of trading at Performance Trust Capital Partners. “That was an achievement. They went a long way to ensure an A rating and that will give them market access.”
The protections won’t fully shield yields or the bonds’ value from the district’s negative headlines, Battle said, but he called it “good financial engineering.”
Good financial engineering, huh.
A HYPOTHETICAL SITUATION
These stories of how great this deal is spurs me to several questions, especially surrounding any hypothetical Chicago bankruptcy (the de jure form, that is. We’re already getting to see the de facto situation.) Note: I am not a municipal bankruptcy expert in any way. I am just trying to think things through.
Let us suppose that Chicago has to declare Chapter 9 bankruptcy. It’s not only pension debt that would be driving it (though that’s still huge), but there are lots of other outstanding bonds.
I do understand that if Chicago were to undergo such a bankruptcy, these specific CPS construction bonds would be bankruptcy-remote, in terms of being hauled into the federal court. Something similar happened with the swaps with the Detroit bankruptcy, if I remember correctly. Not all assets and liabilities are treated the same under federal bankruptcy law.
That said, what is funding these bonds is a specific tax that can be changed by politicians. It doesn’t matter that there’s a floor written into the tax now. There’s no such thing as a perpetual tax law. Politicians tinker with this stuff all the time, and sometimes taxes are yanked away, especially when there is something politically unpopular going on.
Money going to bondholders when city residents will be taxed out the wazoo to pay for past service (i.e. pensions)? Yeah, that tax may be looked at very very carefully.
And for property tax… the people/companies in those properties can just go away. They have been.
CHICAGO BIGGEST BLEEDER OF POPULATION
More grim news on the population migration front. Headlines in Chicago in each of the past two years have already alerted residents that the city is losing population, based on United States Census Bureau data released annually.
Now Abodo, a national apartment rental listings website, has collated population migration data in major markets nationwide where it does business.
A chart in a new Adobo study titled “The 10 MSAs With the Greatest Population Loss Due To Net Migration” has Chicago right there at the top of the list, with a 0.84 percent net loss over the two-year period 2014 to 2015.
But as Abodo executives note, there may be little comfort for Chicagoans in the fact that New York is No. 2 on the list, because NYC is a much more transient city with a lot of jet setters among its population. So some flux and flow is to be expected in NYC in its population figures.
In Chicago, however, the numbers and supporting information all suggest that people have begun to leave the city for good. And far fewer are deciding to relocate and replace the departing residents because of a variety of factors, including Chicago’s high crime rates, sky-high sales taxes, rapidly-increasing property taxes, and the weather, which no one who still lives here will forget to add to the list. Chicago temps are predicted to fall into the single digits next week for several days.
I guess the Second City is number one at something.
Anyway, I can understand saying these specific bonds are a little less likely to get hit in the event of a bankruptcy, but the practical issue is that they may get hit anyway due to political pressure. Or they may find support eroding as the tax that is supposed to fund them finds its revenues drying up (whether due to people leaving or politicians changing the tax).
I guess we’ll find out how this goes.
Caveat emptor applies here as it does with regards to any financial security.
CHICAGO PUBLIC SCHOOLS WITH GAPING BUDGET HOLE
The Chicago Board of Education on Wednesday approved a revised fiscal 2017 budget that accommodates a new teachers’ contract, but contains a $215 million funding gap for pensions.
The spending plan for the fiscal year that began on July 1 was increased by $55 million to $5.5 billion to reflect an additional contribution of surplus tax increment financing money from the city of Chicago. That money will cover higher costs from a new four-year contract with the Chicago Teachers Union that the board ratified on Wednesday.
Chicago Public Schools (CPS), the nation’s third-largest public school system, is struggling with pension payments that will jump to about $720 million this fiscal year from $676 million in fiscal 2016, as well as drained reserves and debt dependency. The fiscal woes have pushed credit ratings on the district’s $6.8 billion of general obligation bonds deep into the junk category and led investors to demand fat yields for its debt.
Illinois Governor Bruce Rauner last week vetoed a bill to give CPS a one-time $215 million state payment to help cover pension costs.
CPS officials on Wednesday blasted Rauner’s action, while contending there is still time to pressure the governor and state lawmakers to restore the money.
“We will not allow Chicago students, most of them poor and minority, to be held hostage,” said CPS Chief Executive Officer Forrest Claypool.
If the effort fails, School Board President Frank Clark said the district was prepared to deal with the budget gap in January.
The board also reaffirmed its approval for issuing up to $840 million of bonds backed by a new $45 million a year property tax levy earmarked solely for capital expenses.
Oh, it’s $215 million for pensions, which these people never take seriously as a current expense.
So they’ll just move on and keep that hole there, which is, eh, only 4% of the overall budget. A rounding error.
RAUNER WIELDS HIS VETO POWER AND MAKES IT STICK
They did note that CPS was expecting some $215 million in aid from the Illinois state legislature for that pension cost.
Well, the legislature did pass the funding, Rauner vetoed it, and then….
SPRINGFIELD, Ill. (AP) — A spokesman for House Speaker Michael Madigan says Democrats did not have enough votes to override a veto from Republican Gov. Bruce Rauner that eliminates $215 million in aid for Chicago Public Schools’ pension payments.
Senate Democrats used their supermajority Thursday to override the governor shortly after the veto but the House did not vote on the matter before adjourning for the year. Madigan spokesman Steve Brown says the assessment was they “would not be able to override.”
Rauner wants Democrats to help him enact part of his agenda, but neither side has budged and that has left Illinois without a budget for 18 months — the longest any state has gone since at least World War II. The gridlock has crippled social service programs and left higher education institutions facing financial uncertainty due to less state support than they’ve received in the past.
The parties had agreed to the Chicago Public Schools funding in June as part of a six-month spending plan to get the state through the end of the year. But the money promised came with the condition that lawmakers would work on a separate plan to overhaul a statewide pension system that’s more than $100 billion.
Democratic Senate President John Cullerton denied Thursday there had been such a deal. Immediately afterward, Rauner vetoed the funding.
“Breaking our agreement undermines our effort to end the budget impasse and enact reforms with bipartisan support,” Rauner said in his veto message to lawmakers.
The governor has said CPS money must be accompanied by a commitment to fix the state’s overall pension debt to improve Illinois’ fiscal health.
“The taxpayers of Illinois do not want just another bailout,” he said in the veto message. “Let’s get back to work to end the budget impasse and put Illinois on the right track once and for all.”
I went to look what requires to override a gubernatorial veto in Illinois – fairly simple, only needs a 60% majority.
In the Illinois Senate, there are 39 Democrats out of 59 seats, which is 66%.
In the Illinois House, there are 71 Democrats out of 118 seats, which is ….60.1%.
So that means Madigan couldn’t get Democrats to vote party line in the Illinois House.
I wonder who the defector from the party line is.
In any case, I see this as an effective way for Rauner to stop the Lucy-with-the-football crap that people like Cullerton (state Senate leader) and Madigan (state House leader) have done with regards to pension reform for years.
Madigan has been in his position for well-near 20 years. He can take ownership of this crap, for all he wants to foist it on Rauner.
This has been the way — twiddle their thumbs, don’t do anything about the pensions, til.. OH NO IT’S AN EMERGENCY WE GOTSA PASS THIS — and then back to twiddling.
Quinn was spectacularly ineffective, reduced to Squeezy the Pension Python.
Rauner has taken a more effective route, I think. We shall see.
But for now, Squeezy is still alive…
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