I'd bet that Chicago is going to be run by an Emergency Financial Control Board

Next Stop for Chicago: Emergency Financial Control Board

BY Joe Mysak

Editor's note: This Shark believes that Chicago will flourish. Chicago will reap the benefits from the raping of the estates of the elderly by the Probate Court of Cook County. The "cash cow" reaped from the estates of the "big inheritors", the Baby Boomer generation, by the degenerates running this probate court should cover any losses by the city.  Lucius Verenus, Schoolmaster, ProbateSharks.com

 

 

Now that Rahm Emanuel has been reelected mayor of Chicago and that distraction is out of the way, we can all start thinking about the future of the city.

I'm not a betting man. If I were, I'd bet that Chicago is going to be run by an Emergency Financial Control Board, or something like it, within two years, the same as New York City back in 1975 (and until 1986).

The city is now rated Baa2 by Moody's, one step from the basement of investment grade. In cutting the rating ("with a negative outlook'') in February, Moody's said, "The negative outlook reflects our expectation that the city's credit quality could weaken as unfunded pension liabilities grow and exert increased pressure on the city's operating budget.'' Moody's expects "substantial growth in unfunded pension liabilities even if the city's recent pension reforms survive an ongoing legal challenge.''

So a cut to junk may well be in the cards, and with it diminished and eventually lack of access to capital. Chicago has already creatively used, and some would say abused, the municipal market to subsidize city operations, as Kristi Culpepper, the Kentucky official who for many years wrote as "Bond Girl,'' demonstrated in this recent piece, required reading, published on Tumblr.

When the banks no longer want to lend to Chicago is presumably when the state of Illinois would come in, offering cash, loan guarantees, intercession with the federal government and whatever else the city needs in exchange for external management via an Emergency Financial Control Board.

Such boards do what politicians and labor unions won't, which is to get the spending and revenue sides of things aligned. It doesn't look to me like Chicago is going to be able to do that, and remember, we're talking about what is in effect a one-party city.  

As Roger Dunstan of the California Research Bureau wrote in a 1995 overview of New York City's financial crisis, "The Board had the power to review and reject the city's financial plan,

operating and capital budgets, contracts negotiated with the public employees unions, and all municipal borrowing.''
Chicago's pols and unions will of course fight this to the figurative death, as New York City's unions and Mayor Abe Beame did, right to bankruptcy's doorstep. Yet the conclusion will probably be the same. The municipal market better hope I'm right, as the other options are worse for bondholders.
  Why is that? I'm presuming that the state of Illinois can pull itself together in time to help Chicago, and that the state and its fractious lawmakers can summon the foresight and maturity to bail out the nation's third-largest city. This sounds almost quaint, I know.

Unlike New York State in 1975, Illinois is facing budget deficits and a $111 billion pension gap of its own. New York was in relatively more robust health.

Plus these are different times. Not paying bondholders was unthinkable in 1975. Global leaders called President Gerald Ford and talked about the implications of one of the biggest cities in the world going bust. Which is why the federal government, despite the memorable headline "Ford to City: Drop Dead," got intimately involved in New York City's finances for a few years.  

   Four decades on, the situation is a lot different. Political conservatives, once the staunchest defenders of the capital markets, now advocate bankruptcy for cities and even state governments, the better (apparently) to punish those evil public sector labor unions. As we saw in Detroit, union members and pensioners sometimes trump bondholders.
  Two years. That's how long I give the city of Chicago. Good luck, Rahm.  

BY Joe Mysak

Now that Rahm Emanuel has been reelected mayor of Chicago and that distraction is out of the way, we can all start thinking about the future of the city.

I'm not a betting man. If I were, I'd bet that Chicago is going to be run by an Emergency Financial Control Board, or something like it, within two years, the same as New York City back in 1975 (and until 1986).

The city is now rated Baa2 by Moody's, one step from the basement of investment grade. In cutting the rating ("with a negative outlook'') in February, Moody's said, "The negative outlook reflects our expectation that the city's credit quality could weaken as unfunded pension liabilities grow and exert increased pressure on the city's operating budget.'' Moody's expects "substantial growth in unfunded pension liabilities even if the city's recent pension reforms survive an ongoing legal challenge.''

So a cut to junk may well be in the cards, and with it diminished and eventually lack of access to capital. Chicago has already creatively used, and some would say abused, the municipal market to subsidize city operations, as Kristi Culpepper, the Kentucky official who for many years wrote as "Bond Girl,'' demonstrated in this recent piece, required reading, published on Tumblr.

When the banks no longer want to lend to Chicago is presumably when the state of Illinois would come in, offering cash, loan guarantees, intercession with the federal government and whatever else the city needs in exchange for external management via an Emergency Financial Control Board.

Such boards do what politicians and labor unions won't, which is to get the spending and revenue sides of things aligned. It doesn't look to me like Chicago is going to be able to do that, and remember, we're talking about what is in effect a one-party city.  

As Roger Dunstan of the California Research Bureau wrote in a 1995 overview of New York City's financial crisis, "The Board had the power to

Average Yield Spread Between AAA and BBB Munis 

The average yield spread between AAA and BBB long-term tax-exempt securities widened to 1.12 percent in 1975 from 0.63 percent in 1970, showing investors were concerned about how New York City's financial crisis would affect the general municipal market. "This move to quality by investors probably began as a result of the financial problems experienced by the New York State Urban Development Corporation, but New York City's financial difficulties have certainly served to sustain and extend this trend," the St. Louis Fed wrote in a 1975 research paper. The average yield spread between 2009 and 2014 has compressed, showing investors are less worried about the effect of a financial crisis in Chicago on the market.

review and reject the city's financial plan,

operating and capital budgets, contracts negotiated with the public employees unions, and all municipal borrowing.''
Chicago's pols and unions will of course fight this to the figurative death, as New York City's unions and Mayor Abe Beame did, right to bankruptcy's doorstep. Yet the conclusion will probably be the same. The municipal market better hope I'm right, as the other options are worse for bondholders.
  Why is that? I'm presuming that the state of Illinois can pull itself together in time to help Chicago, and that the state and its fractious lawmakers can summon the foresight and maturity to bail out the nation's third-largest city. This sounds almost quaint, I know.

Unlike New York State in 1975, Illinois is facing budget deficits and a $111 billion pension gap of its own. New York was in

relatively more robust health.

Plus these are different times. Not paying bondholders was unthinkable in 1975. Global leaders called President Gerald Ford and talked about the implications of one of the biggest cities in the world going bust. Which is why the federal government, despite the memorable headline "Ford to City: Drop Dead," got intimately involved in New York City's finances for a few years.  

   Four decades on, the situation is a lot different. Political conservatives, once the staunchest defenders of the capital markets, now advocate bankruptcy for cities and even state governments, the better (apparently) to punish those evil public sector labor unions. As we saw in Detroit, union members and pensioners sometimes trump bondholders.
  Two years. That's how long I give the city of Chicago. Good luck, Rahm.