* Eden Martin recently made the case for allowing Chicago to declare bankruptcy in order to get out of its pension obligations…
It seems to me that the most important issues have to do with the fiscal future of Illinois and Chicago. Whatever the fate in the courts of the state’s pension reform law, Chicago has its own unfunded pension debts to deal with, and it needs state legislative permission to do just about anything. So here are some questions for the candidates.
Detroit was able to seek federal bankruptcy protection only because Michigan law expressly permitted it. Illinois, unlike Michigan, has not permitted cities here to seek such bankruptcy protection. Would you, Mr. Candidate, support an Illinois law authorizing Chicago to seek bankruptcy protection, like Detroit? If Chicago can’t pay its bills, isn’t a bankruptcy process of some kind necessary to avoid chaos? […]
If the state’s pension reforms are upheld and if similar reforms are enacted for Chicago, do you think pension reform — by itself — would be enough to avoid fiscal collapse? Have you looked at the numbers lately?
* Kind of extreme, no? Standard & Poor’s now has a negative outlook on the city’s credit rating, but bankruptcy? C’mon, man…
The negative outlook reflects our view of the risks involved in how the city will address its upcoming, large pension payments.
A pledge of the city’s full faith credit and resources, as well as ad valorem property taxes without limitation as to rate or amount, secures its GO bonds.
The rating reflects our assessment of the following factors for the city, specifically its:
• Strong, broad, and diverse economy given its status as a major regional economic center;
• Adequate budgetary flexibility, which indicates that, although the city has home rule status, which provides increased taxing and borrowing capacity, its flexibility is limited by the city’s historical reluctance to adjust property taxes;
• Very weak budgetary performance, reflecting recent deficits and reliance on reserves to balance operations and an outlook of continued budget challenges; however, we note that the city has no plans to utilize its long-term reserves in the service concession reserve fund;
• Very strong liquidity providing very strong cash levels to cover both debt service and expenditures;
• Strong management conditions with good financial practices and policies in place;
• Very weak debt and contingent liabilities position, driven mostly by the city’s high net direct debt; and
• Weak Institutional Framework score.
* From the narrative…
Very strong liquidity
Supporting the city’s finances is liquidity we consider to be very strong, with total government available cash of more than 100% of debt service. We believe the city has exceptional access to external liquidity. The city has issued bonds frequently during the past 15 years, including GO bonds, enterprise fund revenue bonds, and sales tax bonds.
We view the city’s management conditions as strong, supported by “good” financial management practices under our financial management assessment (FMA). The city produces long-term financial and capital plans, which officials update annually. The city has a formal debt management policy and has adopted ordinances that limit the use of nongeneral fund reserves for budget-balancing purposes.
Very weak debt and contingent liability profile
In our opinion, the city’s debt and contingent liabilities profile is very weak, with pension funding levels and upcoming pension payments posing a significant challenge. The city has a combination of fixed-rate and variable-rate debt, and swaps are utilized to hedge risk. We do not view the city’s debt portfolio as being vulnerable to interest rate risk or speculative contingent liabilities. Direct debt is manageable in our view, with total governmental fund debt service at 13% of total governmental fund expenditures in 2012. The city has a roughly $3 billion, five-year bond program, most of it focused on water and sewer projects. We do not expect debt issuance within the next two years to lead to significant increases in the GO debt burden. The city has used bonds to improve and modernize its infrastructure.[Emphasis added.]
* The pension stuff is darned serious, though…
The city’s debt profile is challenged by its pension obligations. The city contributes to four different pension plans. The city’s budgets include pension payments for the four defined benefit plans that fully meet the statutorily required amounts. However, current state statutes in effect base contributions on a multiple of payroll and do not address unfunded liabilities. The budgeted pension payment amount for 2013 is $479.5 million, based on the statutory formula. This stops short of the $1.47 billion actuarially required contribution (ARC) determined in the Dec. 31, 2012 actuarial report. If it was included in the 2013 corporate fund budget, the ARC payment of $1.5 billion would represent roughly 35% of the corporate fund budget, an amount we consider very high.
The overall unfunded liability of the four plans is $19.5 billion as of 2012, up from $11.9 billion in 2009, and the plans altogether are 35% funded. [Emphasis added.]
* While not diminishing the problems, S&P seems to believe they’re manageable. For example…
We consider Chicago’s economy to be strong, broad, and diverse, with employment opportunities spanning all the major industries. Furthermore, the city is home to the headquarters of several large corporations, has a large tourism base, and is a transportation hub.
Adequate budget flexibility
In our opinion, the city’s budgetary flexibility is helped by its reserves in the service concessions and reserve funds. […]
Although the city has taxing flexibility owing to its home-rule status, it has not historically availed itself of that flexibility. Hindering budget flexibility is a political unwillingness historically to raise property taxes to meet budgetary challenges, particularly with respect to looming pension payment increases. In our view, the city also has a limited capacity to cut spending given that nearly two-thirds of 2012 general fund expenses were in the area of public safety.
Bankruptcy would mean a horrible credit rating for possibly decades to come. It should not be an option.