Capitol Fax.com - Your Illinois News Radar » Chicago bond rating lowered three notches
SUBSCRIBE to Capitol Fax      Advertise Here      Mobile Version     Exclusive Subscriber Content     Updated Posts    Contact
CapitolFax.com
To subscribe to Capitol Fax, click here.
Chicago bond rating lowered three notches

Thursday, Jul 18, 2013

* Uh-oh

Moody’s Investors Service has slashed Chicago’s general obligation and sales tax ratings by three notches to A3 from Aa3 due to the city’s large and growing pension liabilities and related budget troubles.

The move affects $8.2 billion of Chicago’s general obligation and sales tax debt, Moody’s said in a statement. It will make it more expensive for the city to borrow money, and Moody’s said it may further downgrade the ratings if conditions don’t improve.

“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 said.

The credit rating agency added that its negative outlook is based on the “dramatic spike in annual pension payments scheduled to take effect in the 2015 budget year.”

Moody’s said it expects the payments “will place material strain on the city’s operating budget.”

* Meanwhile, Marc Joffe makes more assertions about the state’s bond ratings

Noting that Illinois has not defaulted on a bond since the 1840s, Pallasch and Sinsheimer said Illinois bonds are safe investments. Marc Joffe, a San Francisco consultant, agrees.

“I think people have vastly inflated estimates of how risky Illinois bonds are,” says Joffe, who once worked for Moody’s Investors Service, which shares Standard & Poor’s pessimistic views on Illinois’ bonds. “There’s not a lot of distance between Illinois and junk (bond status).”

If he were doing the math – and he has – Joffe said that he would rate Illinois at between AA and AAA, which is the highest possible grade. In a paper published last month, Joffe compared Illinois with Indiana, which has a high credit rating from Wall Street, and found that while bonds issued in the Land of Lincoln are riskier than bonds issued by the Hoosier State, the risk in both cases is negligible.

He likens the difference to the odds of dying in a plane crash versus the odds of dying in an automobile accident. Traveling in a a car is riskier, he says, but the odds are so remote that virtually no one takes them into account when deciding how to get from Point A to Point B.

- Posted by Rich Miller        

26 Comments
  1. - wordslinger - Thursday, Jul 18, 13 @ 1:25 pm:

    Three clicks in one swoop — how do you like your investment banker pals now, Rahm?


  2. - Tify - Thursday, Jul 18, 13 @ 1:26 pm:

    Time to tap into TIFs.


  3. - Regent Wilson - Thursday, Jul 18, 13 @ 1:27 pm:

    I will wait to see what Repubican Leader Kay’s adding machine says about this before I comment.


  4. - wordslinger - Thursday, Jul 18, 13 @ 1:36 pm:

    Moody’s is just looking out for the investor class — not by honestly assessing risk, but preparing for the Fed’s pullback in buying bonds.

    Once that happens, the folks who’ve enjoyed the bull run in stocks will start dumping and look to park their assets in higher-yield bonds. Much safer and the price will be right.

    Pension obligations high? Pay me. Detroit going bankrupt? Pay me.


  5. - warhed - Thursday, Jul 18, 13 @ 1:36 pm:

    Nice argument Marc, buts its the direction of the bond rating thats key here, in addition to the outright rating. And that direction is not going to change in the foreseeable future.


  6. - Demoralized - Thursday, Jul 18, 13 @ 1:45 pm:

    ==its the direction of the bond rating thats key here, in addition to the outright rating==

    You apparently didn’t grasp anything he said. His entire point was that the ratings are garbage based on the risk associated with our bonds.


  7. - PublicServant - Thursday, Jul 18, 13 @ 2:15 pm:

    Do the Koch brothers own Moodys? They seem to be more of a GOP propoganda arm than a legitimate ratings firm, which may be one of the bigger oxymorons to ever exist.


  8. - Biker - Thursday, Jul 18, 13 @ 2:16 pm:

    I don’t like my credit score either, but I do have one, and I need to play by their rules for what financial security means in order to improve it. I would appreciate a mandatory percentage of pension investment be made in Illinois based companies if the rate of return will become variable.


  9. - wordslinger - Thursday, Jul 18, 13 @ 2:28 pm:

    – I would appreciate a mandatory percentage of pension investment be made in Illinois based companies if the rate of return will become variable. –

    Stu Levine would have loved that!

    I understand the populist sentiment (not sure what you mean “if the rate of return will become variable”), but let’s hope the hedgies that get the business of pension fund investing are looking to safely maximize their 20% of gains, in addition to the 2% they take off the top.


  10. - Judgment Day - Thursday, Jul 18, 13 @ 2:32 pm:

    “You apparently didn’t grasp anything he said. His entire point was that the ratings are garbage based on the risk associated with our bonds.”

    Well, then it’s time for Marc Joffe to start his own credit rating service. Unfortunately, he’s unlikely to be able to do that because of the rules governing the entire process.

    It’s way too complex to go into, but federal laws were changed some years ago which effectively ‘anointed’ the current ‘Big Three’ (S&P, Moody’s, & Finch) as the primary credit rating agencies.

    Joffe is probably correct, but with where we are today, until there’s some really major positive change (meaningful pension reform, paying off the backlog of past due bills, etc.), nothing is likely to change with the ‘Big Three’s’ fiscal view of Illinois.

    The ‘Big Three’ don’t want to change their business model of getting paid for ratings services (why should they, when they’re making boatloads of money, and the federal government is acting like a toothless watchdog that’s currently in a coma), so Illinois, like many other places gets to pay the price.

    Joffe complaining about Illinois’s bond rating is a little like Republican’s complaining about Madigan’s leadership. “So What?”


  11. - Soccermom - Thursday, Jul 18, 13 @ 2:33 pm:

    Hey, Word — more than half of other states require a small slice of public pension funds to be invested in in-state companies. It’s not a bad idea.


  12. - wordslinger - Thursday, Jul 18, 13 @ 2:42 pm:

    Soccermom, I’m not so sure. Seems way too cozy to me.

    I’m not against an investment in in-state companies per se, but a mandatory minimum seems to be taking the eye off the ball of safety/return.

    What’s an in-state company, anyway? Boeing? CAT? McDonalds? Are you investing in their stocks or some physical asset?

    The Big Guys can roll the state with tax breaks and DCEO grants anytime they want. I don’t know that they need a piece of the pension funds.


  13. - Fed up - Thursday, Jul 18, 13 @ 2:57 pm:

    Time for TIF reform, fixing the Daley boondoggle parking meter deal and canceling the 55+ million being wasted on Maggie Daley park. Let all the people Daley made rich with sweet deals pay for the park


  14. - walkinfool - Thursday, Jul 18, 13 @ 3:59 pm:

    Biker: The difference is that credit scores have been demonstrated again and again to predict actual future losses, while these government bond ratings have not.

    The interesting thing is that most sophisticated investors know that, and will continue to oversubscribe Illinois bonds.


  15. - Madison - Thursday, Jul 18, 13 @ 4:27 pm:

    Detroit just went BK…but I dont see that as a problem for Chicago. The tax base in Detroit is hit by a population loss of 1000000 people. Thats real tough to get past.


  16. - Precinct Captain - Thursday, Jul 18, 13 @ 4:44 pm:

    ==They seem to be more of a GOP propoganda arm than a legitimate ratings firm==

    We all know from the Great Recession that the ratings firms are basically garbage and tell people what they want to hear. It is no surprise they are off the mark again.


  17. - Formerly Known As... - Thursday, Jul 18, 13 @ 4:49 pm:

    Detroit’s bankruptcy filing won’t exactly calm the muni markets or do much to help Chicago on the heels of this downgrade.


  18. - cod - Thursday, Jul 18, 13 @ 5:03 pm:

    In Ty Fahner’s March 8th speech at a Union League business luncheon, he bragged that he was the one who pressured the rating agencies to lower their ratings, and a discussion ensued about “being irresponsible to be responsible” by forcing an even lower rating, even to junk bond status, to pressure the GA to act. TF explained that he was holding back. I suppose he was waiting for the best time to add more pressure.


  19. - wordslinger - Thursday, Jul 18, 13 @ 5:29 pm:

    In 1910, a couple years after the Model T’s first began rolling off the assembly lines, Detroit’s population was 465,000.

    Population maxed out in 1950 at 1.85 million, as most the world’s industrial base outside the United State remained in ruins and Detroit was producing half the internal combustion vehicles on the planet.

    They’ve continually lost market share since then, both domestically and internationally. But then, the U.S. Army Air Corps B-29 Superfortress gave them something of a competitive advantage through the 40s, lol.

    Today’s population is 701,000.

    That’s a lot of ups and downs over a hundred years.


  20. - Formerly Known As... - Thursday, Jul 18, 13 @ 6:00 pm:

    After reading @wordslinger’s comment above, I am struck by a coincidence that may or may not be relevant in the eyes of some.

    === Population maxed out in 1950 at 1.85 million ===

    It appears Chicago’s population maxed out in 1950 as well.

    Chicago has lost nearly 1 million people between 1950 - 2010.

    Talk about a shrinking tax base.

    Losing 26% of your population with no clear reversal in trend? Ouch.


  21. - wordslinger - Thursday, Jul 18, 13 @ 6:15 pm:

    –It appears Chicago’s population maxed out in 1950 as well.–

    Geez, dude, there’s no mystery here. You’ve heard of the suburbs, right? The GI Bill? 30-year mortgages? Interstate highway system? Big, fast cars? Jet planes? Air conditioning? The TVA and Hoover Dam?

    Those changes and many more accommodated an opening up of the country and a gradual shift south and west.

    Check out the population of Arizona in 1950. Or Florida. Or California.

    But that doesn’t make every city in the Northeast or Midwest Detroit. There are unique factors at play there.

    Chicago in 1950 was bursting at the seams.


  22. - ejhickey - Thursday, Jul 18, 13 @ 7:50 pm:

    chicago’s credit rating would probably improve if they passed a city income tax in order to raise more revenue.


  23. - steve schnorf - Thursday, Jul 18, 13 @ 9:21 pm:

    The Chicago chickens have been due home to roost for quite a while now. Why do you think the Skyway deal, the parking meter deal, etc were done. I believe Chicago’s financial situation is materially worse than the State’s is because their options and opportunities are fewer. At this point, IMHO, very little of this is Emanuels fault. But before too long though, politically he owns it and I don’t see any solutions in sight. When people suggest selling the Tollway, for example, as a possible “solution” to the State’s problems, they are heading down that same path. That is a lesson Governor Quinn seems to understand pretty well now; you can’t prop up the hose of cards with one-time revenue sources for very long, and doing so exponentially compounds the problem.


  24. - Formerly Known As... - Thursday, Jul 18, 13 @ 9:44 pm:

    === But that doesn’t make every city in the Northeast or Midwest Detroit. ===

    Agreed. No one is claiming the sky is falling.

    The comments by that woman from Detroit are striking, however. Her description of events and the decades long accumulation of debt, combined with the steady decline in population, stands out like a red flag.

    In many ways, Steve Schnorf’s comment strikes at the heart of the matter. Chicago’s current state isn’t Emanuel’s fault at the moment. It is the byproduct of decades of overspending combined with a shriking tax base.

    Those are long term trends that can’t be turned around on a dime.

    Problem is, Chicago has less room for error than the state does. Meanwhile, there aren’t many adult voices in the room… at least not as long as Mayor Emanuel and 39 legislators support attempts to slip a Chicago pension “holiday” through the legislature on the last day of session.

    This ship won’t turn around on a dime, but someone has to get behind the wheel before things start moving.

    Right now, Chicago is rudderless.


  25. - Lost in the Weeds - Friday, Jul 19, 13 @ 12:34 am:

    I guess the Bond Rating Companies have some value. The ratings are used by many investors and others to help value bonds. But one does wonder just how meaningful the ratings are when someone decides to hold bond ratings company accountable and the ratings company claims the ratings are “puffery”.

    From the judge in the US case versus S and P,

    “This begs the question: if no investor believed in S&P’s objectivity, and every bank had access to the same information and models as S&P, is S&P asserting that, as a matter of law, the company’s credit ratings service added absolutely zero material value as a predictor of creditworthiness?”

    http://dealbreaker.com/2013/07/judge-doesnt-believe-sp-that-no-one-believed-in-its-ratings/


  26. - wordslinger - Friday, Jul 19, 13 @ 7:56 am:

    Schnorf tells a cautionary tale about the Chicago experience.

    Daley tried to sell off everything to tuck away cash for his Olympics’ legacy-shopping pipedream. Didn’t quite work out.

    Once that failed, he spent all that one-time money for ongoing operations. Absolutely reckless fiscal policy.

    As some have pointed out, there’s probably a day of reckoning coming with the TIF slush funds — and Chicago property taxes as well.


Sorry, comments for this post are now closed.


* Question of the day
* Durkin and Brady: A study in contrasts
* Capital bill roundup
* It's just a bill
* Turnover
* Cannabis roundup
* Energy bills put on hold as new poll shows strong support for clean power
* Illinois Secretary of State Securities Department probes Sen. Van Pelt
* When Will The Illinois House Pass the Reproductive Health Act?
* Yet another reason why I love my blog commenters
* SUBSCRIBERS ONLY - Today's edition of Capitol Fax (use all CAPS in password)
* *** LIVE COVERAGE ***
* Yesterday's stories

Support CapitolFax.com
Visit our advertisers...

...............

...............

...............

...............

...............

...............

...............

...............


Loading


Main Menu
Home
Illinois
YouTube
Pundit rankings
Obama
Subscriber Content
Durbin
Burris
Blagojevich Trial
Advertising
Updated Posts
Polls

Archives
May 2019
April 2019
March 2019
February 2019
January 2019
December 2018
November 2018
October 2018
September 2018
August 2018
July 2018
June 2018
May 2018
April 2018
March 2018
February 2018
January 2018
December 2017
November 2017
October 2017
September 2017
August 2017
July 2017
June 2017
May 2017
April 2017
March 2017
February 2017
January 2017
December 2016
November 2016
October 2016
September 2016
August 2016
July 2016
June 2016
May 2016
April 2016
March 2016
February 2016
January 2016
December 2015
November 2015
October 2015
September 2015
August 2015
July 2015
June 2015
May 2015
April 2015
March 2015
February 2015
January 2015
December 2014
November 2014
October 2014
September 2014
August 2014
July 2014
June 2014
May 2014
April 2014
March 2014
February 2014
January 2014
December 2013
November 2013
October 2013
September 2013
August 2013
July 2013
June 2013
May 2013
April 2013
March 2013
February 2013
January 2013
December 2012
November 2012
October 2012
September 2012
August 2012
July 2012
June 2012
May 2012
April 2012
March 2012
February 2012
January 2012
December 2011
November 2011
October 2011
September 2011
August 2011
July 2011
June 2011
May 2011
April 2011
March 2011
February 2011
January 2011
December 2010
November 2010
October 2010
September 2010
August 2010
July 2010
June 2010
May 2010
April 2010
March 2010
February 2010
January 2010
December 2009
November 2009
October 2009
September 2009
August 2009
July 2009
June 2009
May 2009
April 2009
March 2009
February 2009
January 2009
December 2008
November 2008
October 2008
September 2008
August 2008
July 2008
June 2008
May 2008
April 2008
March 2008
February 2008
January 2008
December 2007
November 2007
October 2007
September 2007
August 2007
July 2007
June 2007
May 2007
April 2007
March 2007
February 2007
January 2007
December 2006
November 2006
October 2006
September 2006
August 2006
July 2006
June 2006
May 2006
April 2006
March 2006
February 2006
January 2006
December 2005
April 2005
March 2005
February 2005
January 2005
December 2004
November 2004
October 2004

Blog*Spot Archives
November 2005
October 2005
September 2005
August 2005
July 2005
June 2005
May 2005

Syndication

RSS Feed 2.0
Comments RSS 2.0
WordPress




Hosted by MCS SUBSCRIBE to Capitol Fax Advertise Here Mobile Version Contact Rich Miller