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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        

  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?”

  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.

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