Chicago next to follow Detroit ? Chicago sees its cash balance falls to 33 million , debt triples , ratings plummet........

http://www.zerohedge.com/news/2013-07-28/chicago-next-windy-city-cash-balance-plummets-only-33-million-debt-triples

Chicago Next? Windy City Cash Balance Plummets To Only $33 Million As Debt Triples

Submitted by Tyler Durden on 07/28/2013 11:06 -0400

• Bond
 
• Capital Markets
 
• Detroit
 
• Ford
 
• New Normal
• Pension Crisis
 
• Rahm Emanuel

While everyone's attention is focused on the Detroit bankruptcy, and just what assets the city will sell in lieu of raising a DIP loan, perhaps it is time to refocus attention to the city 300 miles west: Chicago. According to the Chicago Sun Times citing year-end audits, Obama's former right hand man, Rahm Emanuel, closed the books on 2012 with $33.4 million in unallocated cash on hand — down from $167 million the year before — while adding to the mountain of debt piled on Chicago taxpayers. In addition to a liquidity problem, Chicago may also be quite insolvent as the city's total long-term debt soared to nearly $29 billion. That’s $10,780 for every one of the city’s nearly 2.69 million residents. More than a decade ago, the debt load was $9.6 billion or $3,338 per resident. Of course, in a world in which debt is "wealth", this is great news... at least until debt becomes "bankruptcy."

Ironically last year, now-retiring City Comptroller Amer Ahmad argued that the city’s debt load was not “troubling” because, "We still have a very strong bond rating. Our fiscal position is getting better every year and we are aggressively managing our liabilities and obligations" (very much awhat the ECB's Mario Draghi tells the world when he gives the periodic monthly update of European capital markets during the central bank's press conference). It is ironic because last week, Moody’s downgraded Chicago from Aa3 to A3in an unprecedented three notch cut in the city’s bond rating, citing Chicago’s "very large and growing" pension liabilities, "significant" debt service payments, “unrelenting public safety demands” and historic reluctance to raise local taxes that has continued under Emanuel.

Moody’s noted that the city’s total fund balance at the close of 2012 was $231.3 million and that Chicago has just $625 million in “leased asset reserves.” Had the city fully funded its $1.5 billion “actuarially required contribution” to its four under-funded city employee pension funds in 2012 alone, “these two reserves would have been entirely depleted,” Moody’s said.

The “unassigned” balance is $33.4 million. Experts recommend a cash cushion of at least $200 million for a budget the size of Chicago’s, according to the Civic Federation. The city ended 2009 with an unallocated checkbook balance of just $2.7 million.

According to the Sun Times, Chicago budget Director Alex Holt blamed the $133.6 million drop in cash on hand balances on "honest" budgeting and ending the long-standing practice of carrying “ghost” vacancies. "We’re trying to be more transparent about what we’re really spending and taking in — not just carrying a bunch of people who took up money in the budget and left money on the table at the end of the year," Holt said. Well that's a welcome development - unfortunately the inevitable outcome of honest in the New Normal is bankruptcy.

"Let’s be straightforward about what we’ve got to spend and not pretend we’re gonna hire for a position we haven’t hired for, who know how many years when those resources are need to provide other services. ... This is about matching revenues with expenses. You don’t want to over-tax people."

Wait, did someone from Chicago just say that?

As also disclosed by the Sun Times, audits by the accounting firm of Deloitte & Touche provide a treasure trove of information about city finances and operations.

Interesting nuggets include:

• Chicago’s principal private employers were: J.P. Morgan Chase (8,168 workers); United Airlines (7,521); Accenture LLP (5,590; Northern Trust (5,448); Jewel Foods (4,572) and Ford Motor Co. (4,187). The 2012 city payroll was 33,708 — down from 40,297 in 2006.
• The number of “physical arrests” by Chicago Police officers declined again — from 152,740 in 2011 to 145,390 in 2012. That continues a six-year trend that coincides with the hiring slowdown that caused a dramatic decline in the number of police officers. Police made 227,576 arrests in 2006. The number of arrests has been dropping like a rock ever since. The Chicago Police Department has long argued that it doesn’t measure the success of crime-fighting strategies simply by the number of arrests.
• Emergency responses continued their steady rise — to 472,752. That’s up from 300,971 in 2006.
• O’Hare Airport operating revenues were up by $23.2 million, a 3.3 percent increase, thanks to rising terminal rental and use charges. Operating expenses rose $19.1 million because of rising personnel and contracting costs. Airline ticket taxes known as “passenger facility charges” generated $154.5 million in 2012.
• The number of passenger “enplanements” rose by a modest 37,000 — to 33.24 million. That’s despite a continued decline by O’Hare’s two largest carriers — from 8.7 million passenger boardings in 2011 to 7.4 million in 2012 at United Airlines and from 7.6 million to 7.2 million by American.
• In 2003, United and American together accounted for 67.7 percent of O’Hare enplanements. Now, it’s just 44 percent.
• Budget-oriented Midway Airport is thriving, spelling potentially good news if, as expected, Emanuel chooses to revive the $2.5 billion deal to privatize Midway that collapsed for lack of financing.
• Midway boardings rose from 9.45 million in 2011 to 9.78 million last year. Operating revenues were up just $462,000 because of decreased landing fees and terminal use charges. That’s even though concession revenues rose by $1.8 million due to an increase in parking, restaurant and auto rentals. Operating expenses rose by $4.2. Ticket taxes generated $43.9 million.
• The 55 percent subsidy to retiree health care that Emanuel wants to phase out and retirees are suing to maintain cost the city $97.5 million in 2012.
• Daily refuse collections declined from 3,983 tons in 2011 year ago to 3,763 in 2012. Last year’s 52-ton increase had reversed a five-year trend. The amount of garbage generated by the 600,000 Chicago households was 4,451 tons a day in 2006 to 4,240 in 2008.
• Thanks to last year’s record heat and drought conditions, average daily water consumption rose by 23 million gallons — to 793 million gallons — reversing a steady decline. In 2006, Chicago’s 1.04 million households were guzzling 884.9 million gallons-a-day. Operating revenues in the city’s water fund were up by $122.1 million or 29.6 percent, thanks to Emanuel’s 25 percent increase in water rates.
• Chicago’s 165 tax-increment-financing districts had a collective balance of $1.5 billion. Most of that money is uncommitted, fueling an aldermanic demand Emanuel has rejected: to declare a TIF surplus and use the money to reduce some of the 3,000 layoffs at Chicago Public Schools.
• The condition of Chicago’s four city employee pension funds is growing ever more precarious. The firefighters pension fund has assets to cover just 25 percent of liabilities, followed by: Police (31 percent); Municipal Employees (38 percent) and Laborers (56 percent).
• Chicago’s historical collections and works of art are valued at $13.2 million.

There's all that, and then there is the now traditional weekend slaughter of countless people as irrefutable proof that guns laws work, although maybe not in the city they were implemented.

By July 31, Emanuel must release a preliminary city budget. It’s almost certain to include another massive deficit — strengthening the city’s case in contract talks with city unions — that will have to be closed with more layoffs, service cuts and new revenues.

Since Emanuel’s 2013 budget held the line on taxes, fines and fees — beyond those set in motion the year before and annual increases in parking meter rates locked into the 75-year lease - what appears inevitable is another rise in the cost of Chicago living. The mayor also eliminated 275, mostly-vacant jobs while making strategic investments in tree-trimming, rodent control and children’s health and after-school programs.

But, aldermen warned that it was the calm before the storm: a painful solution to the city’s pension crisis that will require both new revenues and concessions from city employees.

Of course, now that Detroit has shown the way, and since he who defaults first, defaults best (and the second best and so on), there is a far more realistic outcome...

FRIDAY, JULY 26, 2013

Chicago CEO Club, With Rahm and Pritzkers on Board, Pushed for Chicago Bond Downgrade, Whacking Local Investors and Pension-Holders

Even more so than most cities, Chicago has had the best government money can buy. In this case, the money is willing to engage in a scorched-earth policy of crushing local investors and wrecking the city budget to achieve its end of taming unions and making Chicago even easier pickings for looting via infrastructure sales.

The backdrop is that the city was hit with a stunning three-ratings-notch downgrade by Moody’s last week, from AA3 to A3. As the Chicago Sun-Times stressed, that sort of drop is unheard of absent a natural catastrophe. From the article (hat tip Joe Costello):

Moody’s Investors dropped the city’s bond rating from Aa3 to A3, citing Chicago’s “very large and growing” pension liabilities, high-fixed costs, “unrelenting public safety demands” and “significant” debt load.

“You don’t usually see a triple-downgrade unless there is a catastrophic event, such as a natural disaster or terrorist attack,” said Civic Federation President Laurence Msall.

“This is a financial hurricane event for Chicago. … The city’s borrowing costs will rise dramatically and their ability to use creative financing is going to be limited because of the costs associated with having such a low rating.”

The bond rating at the Chicago Public Schools has dropped repeatedly since Emanuel took office, but Thursday’s triple-drop was the first impacting the city’s bond rating.

“The current administration has made efforts to reduce costs and achieve operational efficiencies, but the magnitude of the city’s pension obligations has precluded any meaningful financial improvements,” Moody’s wrote

Emanuel responded by essentially saying, “I told you so.”

The immediate loser are local investors, since municipal bonds are generally owned by people in the immeidate area, and the city, since it will face higher borrowing costs. So why is Rahm so smug, and why was he so keen to see a downgrade? Normally corporate CEOs and city managers tout the prospects of their charges and want them to have the most favorable borrowing costs.

But the big point of friction has been Chicago’s underfunded pensions, the rest of over ten years of the city failing to contribute enough annually. And Rahm, rather than trying to find equitable solutions, has instead been playing hardball from when he took office:

Last year, Emanuel blindsided and infuriated union leaders whose collaboration he had promised to seek to solve the pension crisis.

Instead of negotiating first with union leaders in Chicago, he went to Springfield to lower the boom. The following day, he sent a letter to city employees to soften the blow of the bitter pill he’s asking them to swallow: a 10-year freeze in cost-of-living increases for retirees; a five-year increase in the retirement age; a 5 percent increase in employee contributions and a two-tiered pension system for new and old employees.

Labor leaders accused the mayor of pitting hardworking employees against taxpayers by portraying a 150 percent increase in property taxes as the only alternative to employee concessions.

In the end, Chicago’s pension crisis was put off along with state’s $83 billion pension problem as lawmakers continued to grapple with rival plans championed by House Speaker Michael Madigan and Senate President John Cullerton, both Chicago Democrats.

With that background, here’s the next piece of the story: local CEOs have been pushing the rating agencies for downgrades. Watch this video starting at 47:00. The speaker is Ty Fahner, the head of the Civic Committee of the Commercial Club of Chicago. Members include the union-busting Pritzers, both Penny and Thomas, a long list of current and recent corporate CEOs and chairmen, influential members of the banking and real estate industries, partners from major law firms, and Rahm as an “honorary members”. This is a Who’s Who of business Chicago.

Not only was Fahner open about how aggressive the lobbying by the CEOs for the downgrade had been, and didn’t disagree with the questioner who called it irresponsible (as in “we know we are doing harm to promote what is good for us”), he said they’d had to back off because they didn’t want their handiwork to be too visible, and was exhorting people in the room to take up the campaign for him.

So here we have it: city fathers working to wreck a city budget so their companies will benefit from more tractable, as in more broke, local workers.

I asked a colleague who had worked for Moody’s in the 1990s why outside parties were allowed to influence ratings. His reply via e-mail:

When I was at Moody’s, a substantial majority of the rating downgrades or upgrades that took place were initiated by an outside investor inquiry.

These days, it’s big business for investors to research a bond, conclude that it should be upgraded or downgraded, take the appropriate position in the bond, and then lobby the rating agency to make the move that is supported by their research, and profit from the change in market value (or market to model valuation) that accompanies the rating change.

Since rating agencies have historically invested virtually nothing in surveillance, it is not hard for a diligent investor to be ahead of the rating agency action. Once the rating agency gets the info on the bond, it is very hard for the rating agency to ignore the information.

So these Illinois business leaders are just applying the same techniques that people at Third Point, Paulson, Elliot, etc. have been applying for years. (Not only that, the rating agencies use the same approach against competitors- if they hear from investors/issuers that a competing rating agency is doing something too aggressively, they call it into the SEC – which is what happened to Egan-Jones).

When I first read about the downgrade, my reaction had been that Rahm must have pushed for it. My colleague had a similar reading:

Also, I’m pretty sure I read in last couple of days that Rahm himself lobbied Moody’s to downgrade his state. I think that’s pretty fucked up, but I’m sure his hedge fund buddies taught him all about it. It’s about as evil as I would expect from Rahm as an elected politician.

Nothing has changed with the current corrupt ratings system because it serves too many powerful interests too well. Jane Hamsher, based on a detailed construction of when S&P became a big scaremonger over US deficits and downgraded the US (which was supposed to End the World as We Knew It but as we predicted, didn’t), made a persuasive case that the ratings agency took this stance to ward off regulatory action. Had the US downgrade produced the bond yield blowout that the financial media was convinced would happen, it’s a near certainty that Obama would have gotten his Grand Bargain and Social Security and Medicare would have been trimmed in a serious way. You can expect more drumbeating about the US rating as Obama makes another Grand Bargain push (the biggest upside of the Edward Snowden revelations may not be any curtailment of the surveillance state, but forcing Obama to divert so much political capital to that fight that he doesn’t have enough chips left to push through Medicare and Social Security whackage).

As our former ratings agency staffer concluded:

It is unreasonable to expect that anything would have gotten better with the rating agencies when nothing has been done to change anything. If elected officials really wanted this sort of thing to stop, they would actually, you know, do something. It is clear that they are happy with the current system, which includes a lot more lobbying activity from the big three than it did in the past.

And increasingly, one of the pet political uses is for ratings to serve, as the questioner indicated in the video, to create the illusion that “the market” is insisting on austerity, when powerful people are rigging the process.