Coming to a municipality near you.
Chicago is another trailblazer. But it’s not alone. Other cities are lining up behind it. Bankruptcy may still be the route to go. But until then, homeowners, renters, drivers, users of phones, etc. – in other words regular families who’re just sitting ducks – are going to get squeezed dry, in order to slow the momentum of the public-employee pension crisis eating up the city’s and the school district’s finances.
“Because of a new accounting rule, Chicago now has to report its pension debt on its balance sheet,” explains Truth in Accounting. “As a result, the city’s reported pension debt grew from $8.6 billion in 2014 to $33.8 billion in 2015.”
The funding hole for pensions amounts to $18.6 billion, according to current estimates, despite six years of booming asset prices. What is this going to look like when asset prices sag?
The City Council approved Mayor Rahm Emanuel’s $8.2 billion budget yesterday. Crisis or no crisis, it’s up 4.8% from last year. There wasn’t anything to debate because the tax and fee hikes had been done outside the budget process.
But this is what Chicago has to deal with. On November 9, S&P Global Ratings cut Chicago Public Schools (CPS) to deep junk (triple-C), citing the district’s “continued weak liquidity in its most recent cash flow forecast and reliance on cash flow borrowing, combined with the increased expenditures in the district’s new labor contract that exacerbate the district’s structural imbalance challenges.”
On Monday, the district scrapped efforts to sell $426.3 million of bonds this year, citing “changing market conditions.” It coincided with the post-election jump in interest rates. A spokeswoman told the Chicago Tribune, “We’ll sell the bonds when market conditions are optimal.”
Last January, the district already delayed an $875-million bond sale “that became tainted by bankruptcy talk,” as Reuters put it at the time.
On November 7, Moody’s affirmed its junk rating for the city (Ba1), with negative outlook, citing “a very weak balance sheet arising from high and growing unfunded pension liabilities.”
The rating acknowledges the benefit of significant tax hikes [we’ll get to this “benefit” in a moment] that will fund increased pension contributions and reduce the risk of plan asset depletion. However, the city’s unfunded pension liabilities will continue to grow, albeit at a slower rate.
Moody’s also stamped its “negative outlook” on Chicago’s rating due to the risks of “potential contagion” from the school district:
Sustained fiscal stress at CPS could pressure Chicago’s credit profile in various ways, from constraining the city’s practical ability to raise revenue for city obligations to raising the city’s borrowing costs.
The city’s borrowing costs have already blown through the roof, as our Chicago gadfly from Truth in Accounting, Bill Bergman, points out: Sinkhole City Chicago in Worse Fiscal Shape than Detroit?……