What’s the over/under, or more aptly, the before/after on Chicago going bankrupt now that a court has declared its pensions sacrosanct? SLL says 12/31/16, but other oddsmakers may have other dates. From Margaret Cronin Fisk at bloomberg.com:
State high court upholds decision blocking pension changes
City warned funds risk running out of money unless altered
Chicago’s plan to ease its $20 billion public-worker pension deficit was ruled illegal by the Illinois Supreme Court, a decision that the city warned may lead to the funds’ running out of money and worsen its financial strains.
The Chicago plan, passed in 2014, violates the Illinois Constitution, which bars the diminishing of public pensions, the court said Thursday. The finding upholds a lower court decision from July and follows a similar ruling by the Illinois Supreme Court last May preventing changes to the state’s pension funds.
“It’s disappointing, but not unexpected,” said Paul Mansour, head of municipal research at Conning, which oversees $11 billion of state and local debt, including Chicago securities. “It will take longer to bring these costs under control absent the ability to enact common sense reforms that were negotiated.”
The city, the third-largest in the nation, shortchanged its pensions over the last decade, creating a shortfall that’s left it with a lower credit rating than any big U.S. city except once-bankrupt Detroit. Under the now void law, its projected annual payment of $886 million due this year to its four retirement funds was more than twice what it was a decade ago, spurring officials to adopt a record property-tax increase to ease the impact on the budget.
The ruling in the Chicago case impairs Mayor Rahm Emanuel’s efforts to pare a deficit that threatens the city’s solvency. The defeat leaves officials racing to devise new ways to shore up retirement system, though it will also save money in the short term because the overhaul required the city to boost contributions to its municipal and laborers funds. The two cover about 60,000 workers and retirees.
To continue reading: Chicago’s Plan to Overhaul City Pensions Dashed by Top Court
This decision ensure a future that more resembles Detroit and Puerto Rico than the New York of the 1970s. The adjudicated law of the land puts public employee pensioners at the top of the capital structure. Please understand that to mean: ahead of essential city services like police, fire, ambulance and education.
The State of IL is also fatally remiss in its pension obligation funding; there will be no salvation from the state. Both Chicago and the state use indefensibly high discount rates on their future liabilities, stupidly expecting to earn about 7% a year every year on the balances they do have invested. Take a look at junk bond yields below 6% and tell me how the equity portion of their portfolios will have to perform to get to a nice 7% return. If you like, look at the recent Citi report on global pension under-funding for a glimpse into a real dystopian future of broken promises and further state efforts to corral revenue from producers for redistribution.
Oh ho ho, that’s not including future unfunded health care liabilities either. It’s likely the courts will rule the same way on those, but that bone’s not being contested legally yet.
If IL and Chicago and all the other government plans used a more appropriate 4% discount rate on future liabilities, their current funding rates would be half or less than currently stated. As the old gas station attendant said to the outta-towner, “Ya can’t get there from he-are.”
Basic action steps for investors: don’t money to ‘people’ whose liabilities grow daily where revenues fail to keep pace. You’re going to get rough treatment in bankruptcy if you think your General Obligation municipal bonds are full-faith-and-credit of an entity that places unfunded pension obligations at the top of the capital structure.
Yes, Chicago and Illinois will be raising taxes and cutting back services in the years ahead. Not hard to see that that is not a recipe for property value growth or business conditions, which speaks to equity investments in the region. Perhaps you’d like to add a sanctuary city status to the mix, both in terms of cost and in terms of attractiveness for producers.
This ruling just put the City of Chicago on auto-pilot. Minor course corrections will not change the economic and eventual cultural path. Detroit had white flight, but let’s think differently about Chicago and Illinois. Green flight in an era of technological mobility will make the drain bigger and bigger relative to the water supply. I’ve urged friends in Chicago to consider other plans for the future but dang if they don’t have families near, kids in school, jobs and so on. I think this one will be very slow motion action film, more in the 15 +/-year time frame, ceteris paribus, as they do have room to raise taxes a lot in IL and Chicago. When their taxes are like NYC/NYS or CA combined taxes their time will shortly measured.
Peace and prosperity, ponder and prepare.
Thanks for this blog post regarding Chicago’s pensions; I really enjoyed it and am definitely recommending this blog to my friends and family. I’m a 15 year old with a blog on finance and economics at shreysfinanceblog.com, and would really appreciate it if you could read and comment on some of my articles, and perhaps follow, reblog and share some of my posts on social media. Thanks again for this fantastic post.