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The sky is very dark, but it’s not falling
Wednesday, Aug 14, 2013 - Posted by Rich Miller * Joe Cahill at Crain’s warns his readers that Illinois and Chicago are about to become Detroit. He concludes…
This is a common fantasy among a large group of folks. We’ve seen it expressed before just about every major state bond offering. The Associated Press fell for it the last time and was completely embarrassed (or should’ve been) after the sale turned out fine. Even Ty Fahner subscribes to this notion, saying in his March address to the Union League Club: “Nobody wants our paper.” Yet, time after time, Illinois bond sales are way oversubscribed. * The truth is, Illinois has incredibly strong laws dictating that bond payments are made first - before pension payments, before school payments, before anything. Bond buyers know this. They also know that they’ll get a better return on their Illinois bond investments, partially because of the hysterical nonsense spewed by people like Fahner. And if they’re paying attention they also know that the state has no invoices sitting in the hopper that are over 30 days old. They also know that our economy, which has big problems, is still far more diverse and vital than Detroit’s ever was. Yeah, it was a major boom town 50 years ago, but its over-reliance on automobile production doomed it. * Look, we’ve got problems here. Big, huge, gut-wrenching problems. But comparing Illinois to Detroit is no more valid than the dire and widespread predictions a couple of years ago that we were the next Greece. * Even so…
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- Springfield_Refugee - Wednesday, Aug 14, 13 @ 9:28 am:
Here here, Rich. A common tactic among the elite business set is to take an issue that is somewhat obscure to laypeople and make it seem like the sky is falling. Keep pointing out their absurdity and I’ll keep subscribing.
- RNUG - Wednesday, Aug 14, 13 @ 9:38 am:
Agreed, more nonsense. The ratings people have been caught with their pants down so many times in the past 6 years or so, they are over-reacting in the opposite directions. Wouldn’t be surprised if they’ve taken to wearing suspenders with their belts.
- Norseman - Wednesday, Aug 14, 13 @ 9:41 am:
Lazy journalism strikes again.
- dupage dan - Wednesday, Aug 14, 13 @ 9:42 am:
There is a problem but the Cahill’s et al are framing it wrong and I can’t figure out why. Folks will keep buying our bonds even if the rate goes up cause it makes more for the bond holder. We know that and also know the down side - higher costs to borrow dings the taxpayers. There’s enough stuff there for the Crain crowd - why keep harping on stuff that backfires on them?
- VanillaMan - Wednesday, Aug 14, 13 @ 9:46 am:
This is Chicago. The sky has never been this dark. The fact that it is not falling, doesn’t make the sky less dark. Is anyone predicting a economic growth spurt for Chicago big enough to save its future, pay it’s debt and bring back middle class families? The sky is very dark. If your money was to be invested into a city, you wouldn’t be choosing one with a very dark sky, falling population, unworkable schools, and declining economic status. It’s their money.
When it is your crop, you would be insane if you didn’t read the sky for tornadoes when the sky is very dark.
- low level - Wednesday, Aug 14, 13 @ 9:48 am:
I would never have expected to see this in a pretty respectable publication like Crains. In some teaparty rag yes, but not Crains. Many thanks for staying up on this, Rich.
- Bill White - Wednesday, Aug 14, 13 @ 9:51 am:
=== One of these days, Illinois or Chicago will float a bond offering and find no takers. ===
Yeah, and one of these days the Sox and Cubs will play a Red Line World Series.
- Anon - Wednesday, Aug 14, 13 @ 9:53 am:
The key is not the bonds, it is the taxpayer. Many posters keep agreeing that we are not in trouble, yet some day the mess this state is in is going to haunt us. The politicians do not know how to pay the bills. Extra revenue last year, we take on more programs to spend it instead of paying the back log. I still think that big money (mobile) will eventually leave this state leaving the ordinary taxpayer to foot the bill.
- Ucster - Wednesday, Aug 14, 13 @ 9:54 am:
“And if they’re paying attention they also know that the state has no invoices sitting in the hopper that are over 30 days old.” This statement is incorrect. Severely incorrect.
- Rich Miller - Wednesday, Aug 14, 13 @ 9:58 am:
===This statement is incorrect. Severely incorrect. ===
The info comes from the comptroller. Go talk to her.
- wordslinger - Wednesday, Aug 14, 13 @ 10:04 am:
More Detroit hysteria. Cahill doesn’t get a lot right here, certainly not about Illinois.
He claims that Illinois is broke and has relied on borrowing. If he means borrowing from pensions and vendors, he’s right. The state hasn’t been floating bond debt for operations.
But now that the state is making its full pension payment, whittling down old bills, and has the payment cycle down to under 30 days, the sky is falling.
See what you get for trying to be responsible?
Perhaps Cahill should read “Crain’s Detroit Business.”
==”Professional investors understand that Detroit’s problems are user-specific,” said Harris May, president of Strategic Partners Investment Advisors Inc.–
–”In my opinion, financial planners should stress that municipal bonds are no different than other types of investment, and they must diversify their portfolios,” he added. “Investors that depend on their coupon income cannot afford to be frightened by headlines into believing that all of their municipal bonds are poor investments, and sell them out of fear.”==
Cahill doesn’t get much right about Detroit, either. Investors continued to purchase Detroit debt, year after year.
–Ultimately, as May summed it up, anyone who bought Detroit muni bonds with their eyes wide open should be in a position either to ride it out or shrug it off.
“With some exceptions, there are few surprises in the municipal bond market and the problems with Detroit have been well-publicized for years,” he said. “Detroit’s bonds have from some time only been suitable for high-risk investors.”–
http://www.crainsdetroit.com/article/20130516/NEWS/130519892/moodys-report-highlights-risks-for-investors-in-detroits-muni-bonds
- Cook County Commoner - Wednesday, Aug 14, 13 @ 10:07 am:
As far as I can tell, a well diversified mix of munis is at very decent prices right now. And as the muni bond yields increase along with the taxes of profligate state and local government issuers, the munis offer residents a hedge against government. The default rate in munis appears to be within historical norms. Some folks are beginning to argue that the increasing returns of munis and their higher liklihood of payment through maturity may make then suitable for sheltered accounts where the tax benefits of munis are nullified.
As for Mr. Cahill and his ilk, there will always be someone to buy the debt if the price is right. Even in Detroit, speculators were gobbling up its bonds at distress prices in hopes of a bailout return.
- walkinfool - Wednesday, Aug 14, 13 @ 10:08 am:
VMan: ==Is anyone predicting an economic growth spurt big enough to save its future, pay off its debt, and bring back middle-class families?==
That hurdle’s a bit overstated, given the challenges to the middle-class, and government debt faced across the country, –
but yes, many are predicting steady economic improvement to maintain a healthy Chicago, and reduce our debt burdens over the next 10 years.
We’re not even remotely close to being unable to sell our bonds. It’s cloudy, but not tornado weather.
- wordslinger - Wednesday, Aug 14, 13 @ 10:10 am:
Also, we can put to rest the lie that institutional investors won’t buy “high-risk” muni debt.
BlackRock, Goldman Sachs, Legg Mason, American Century, JPMorgan, Wells Fargo and others strike me as institutional investors. And they hold a lot of Detroit paper.
http://www.freep.com/interactive/article/20130613/NEWS03/130612016/Database-Which-muni-bond-funds-hold-Detroit-bonds-
- Judgment Day - Wednesday, Aug 14, 13 @ 10:40 am:
“Also, we can put to rest the lie that institutional investors won’t buy “high-risk” muni debt.
BlackRock, Goldman Sachs, Legg Mason, American Century, JPMorgan, Wells Fargo and others strike me as institutional investors. And they hold a lot of Detroit paper.”
If they are buying now, they are placing a bet on the reorganization process. If they are holding based upon a prior purchase, they most likely don’t want to take the haircut, and unbalance their existing bond portfolio at the same time.
Uncertainty plays both ways in a situation like Detroit.
As an aside, I’m not particularly concerned about the bonded indebtedness for the State of Illinois. The state certainly has issues, but they also have options. The city of Chicago is a different story, because they’re going to have to make some serious financial moves over the next several years (starting next year, but certainly in 2015), and they have much more limited options. Cook County has issues also.
As far as the Universities go, well, they have been relatively isolated from major cutbacks. Moody’s Investor Services just sent them a wake-up call. There’s a revolution brewing out in the higher education world, and the State University system needs to wake up.
- wordslinger - Wednesday, Aug 14, 13 @ 10:42 am:
–This is Chicago. The sky has never been this dark.–
Sounds scary.
The sky got pretty dark about Oct. 8, 1871. And in the race riots of 1919. And in April 1968 when the West Side was burning to the ground. And during Spanish Influenza, The Depression, and the chronic cholera epidemics……
Figuring out the money shouldn’t be so tough.
As far as people moving into the city, when was the last time you were there? If you haven’t noticed the residential downtown, South Loop, West Loop, you’re blind. From Crains:
“The hottest urban center in the U.S. — Chicago’s mega-Loop”
http://www.chicagobusiness.com/article/20130302/ISSUE01/303029987/the-hottest-urban-center-in-the-u-s-chicagos-mega-loop
- Grandson of Man - Wednesday, Aug 14, 13 @ 10:44 am:
“the next Greece”
Oh goody, will we also get sunny, warm weather year-round, and spectacular beaches, food and ancient temples?
Part of the problem with Greece was substantial tax evasion by the wealthy and self-employed. We don’t have that problem in Illinois, at least not in that magnitude. I was in Greece twice in the last five years, and the first time I was there, I bought stuff and didn’t get receipts. The last time I was there, even the people on the beach renting beach chairs had little machines that printed receipts, I assume for tax purposes.
http://www.theguardian.com/world/2013/may/06/greece-not-tough-tax-evaders-imf
- A guy... - Wednesday, Aug 14, 13 @ 10:50 am:
The bonds and pension funds consistently get intertwined in these discussions. Our bond rating continues to go down, but the full faith and credit to pay bondholders first is a substantial safeguard for financial types. Most of our pension funds are on a steep trajectory for default. Separate problems with separate solutions. In the pension arena, we’re not as far from Detroit as we’d like to be.
- Judgment Day - Wednesday, Aug 14, 13 @ 10:56 am:
Word:
The City of Chicago has some real issues. Over the next several years (through at least 2015), they have some scary increases scheduled to occur to make up for retirement related funding shortfalls. By 2015, if I remember correctly, it’s like $1.15 billion dollars. That’s a whole lot of extra cash to have to come up with.
- wordslinger - Wednesday, Aug 14, 13 @ 11:01 am:
–Most of our pension funds are on a steep trajectory for default.–
Really? What’s your ETA on that?
–In the pension arena, we’re not as far from Detroit as we’d like to be.–
And where is Detroit? In Detroit’s $18.5 billion bankruptcy filing, pension liabilities are $3.5 billion.
What don’t people get about Detroit? Half of the city’s properties are delinquent in property taxes.
It was a city built for 2 million based on 50% market share in auto manufacturing in 1950. Now there’s 700,000 people and two auto plants.
Once Europe and Japan emerged from the rubble, they got back in business. When Reagan instituted domestic content requirements on autos, they started building plants in the American South.
It’s the creative destruction of capitalism.
- wordslinger - Wednesday, Aug 14, 13 @ 11:23 am:
JD, I don’t doubt that Chicago’s finances were/are mismanaged under Daley/Emanuel, particularly in his last years when Daley was selling assets and stashing TIF money to bankroll his Olympics legacy-shopping.
But Chicago’s underlying economy is not even in the same ballpark as Detroit’s. The problems in Detroit really can’t be fixed in the sense that it will be a city of 2 million again in the near future.
Now, when the Colorado River goes dry out west…..
- low level - Wednesday, Aug 14, 13 @ 11:30 am:
Exactly wordslinger. Chicago was in very bad shape in 1968, 1981, 1985. Today there is unbelievable investments being made in parts of Chicago once considered uninhabitable. N mich ave has more shoppers and tourists then I’ve ever seen. More hotels opening. That development gives investors confidence and supports G.O. and other bonds.
- abc123 - Wednesday, Aug 14, 13 @ 11:30 am:
Mr. Miller, you know politics and you should stick to that. But you know as much about money as the political mopes running the state who provide most of the comments here. Illinois is toast.
- wordslinger - Wednesday, Aug 14, 13 @ 11:31 am:
–Part of the problem with Greece was substantial tax evasion by the wealthy and self-employed–
Tax evasion is the national sport of Greece, Italy and Spain. If you’re paying cash, you can get some great deals.
- wordslinger - Wednesday, Aug 14, 13 @ 11:39 am:
–But you know as much about money as the political mopes running the state who provide most of the comments here. Illinois is toast.–
Quite a fact-based commentary there.
What comes next, Nostradamus?
- Rich Miller - Wednesday, Aug 14, 13 @ 11:40 am:
===Illinois is toast.===
I notice you’re posting from Wilmette. Do you really expect that to turn into a ghost town?
- Fed up - Wednesday, Aug 14, 13 @ 12:13 pm:
Vanilla man,
Chicagos population increased in the last census and its economy is growing, I agree with the dark sky’s and work needing to be done but lies are unnecessary
- Name Withheld - Wednesday, Aug 14, 13 @ 12:18 pm:
Interesting article in BusinessWeek - the Detroit bankruptcy hasn’t fazed the municipal bond market.
http://www.businessweek.com/articles/2013-08-08/detroits-bankruptcy-doesnt-faze-the-municipal-bond-market
To quote the last line from the article: Investor appetite for general obligation bonds seems undiminished in the wake of Detroit’s bankruptcy.
So I don’t think there *will* be a day when Chicago can’t float a bond. Unless some citizen activists in the Commercial Club decide to “talk to some people”.
- Soccermom - Wednesday, Aug 14, 13 @ 12:34 pm:
abc123
Gee, it sounds like you know lots and lots about fiscal policy? Could you please help me learn something? I mean, I’m just a girl, but I will work really really hard to be smart like you.
- A guy... - Wednesday, Aug 14, 13 @ 12:49 pm:
Word, The ED of the IEA suggested the Teacher’s pension fund could default by 2029. That was reported on this site. You can check the others. There’s plenty of conjecture as to when. There’s no doubt as to “if”. They’re not funded, they’ll go broke without huge intervention. You’re smart. I like your comments usually. The Pension Crisis is real. I don’t think the property of the city/state is backing it up. Those clouds are very dark. The bond situation, as Rich describes, is a whole different kettle o’ fish.
- abc123 - Wednesday, Aug 14, 13 @ 1:04 pm:
-Illinois is toast-
Mr. Miller- No, Willmette won’t turn into a ghost town. Reason: average family income here is $130k. Average pension for a couple of teachers in Illinois who work until age 58 under TRS, over 130k. They can comfortably move here with nothing else to do but keep the place up.
- wordslinger - Wednesday, Aug 14, 13 @ 1:07 pm:
–The ED of the IEA suggested the Teacher’s pension fund could default by 2029.–
Gee, I wonder if anything can be done in the next 16 years to prevent that? Crazy things like full annual contributions, perhaps?
State pensions have been in “crisis” since the 1950s, at least. Today’s hysteria is a concerted effort by Civic Committee types to use the fear and anxiety of The Great Recession to railroad cuts to current employees and retirees, bust the unions and eventually get out of the pension business altogether.
I’ve seen this movie. Social Security allegedly has been going bust since the 1970s, at least. The answer to that hysteria was always private accounts.
Of course, that would just be more money to pour into the stock market casino.
Since Lehman went down and somewhere near half of the world equity markets value was wiped out, you don’t hear about that so much.
- PublicServant - Wednesday, Aug 14, 13 @ 1:09 pm:
Spot on Word!
- Cod - Wednesday, Aug 14, 13 @ 1:09 pm:
I dont have Detroit municipal bonds, but I would have had no problem buying their last issues, which had good returns. They are fully insured against default by several big banks. It is those banks who will be left holding the bag, and it is they who are pushing hard to make retired pensioners take the hit instead of the insurers.
- funny guy - Wednesday, Aug 14, 13 @ 2:37 pm:
I have two words for everyone about resolving Chicago’s “pension crisis”—-”SELL OHARE”. Oh, Mayor, you don’t want to sell an asset that provides patronage and multi-million construction and concession contracts. Too bad, pay me my money. If Midway is sold for $2 billion–how much can we get for O’HARE–$10 billion?
Its not even close to the parking meter fiasco–OHARE’S OPERATIONS BY LAW cannot contribute $1 to the City’s budget–in other words, the City is not currently receiving a revenue stream from O’HARE.
- low level - Wednesday, Aug 14, 13 @ 3:25 pm:
abc123 — since you know so much about this, perhaps you could answer this question for me about Detroit:
The financial situation in that city has been bad for years. No question about it. But what changed to make a bankruptcy filing necessary now as opposed to two or three years ago? I’ll take an answer from anyone actually. Why now for Detroit?
- Norseman - Wednesday, Aug 14, 13 @ 3:26 pm:
Wilmette, here are the numbers that accurately go with your drive-by comment.
The MEDIAN household income for Wilmette is $130k according to the census. That means half of the households earn more than $130k. The AVERAGE pension for teachers is $48,216 as referenced in the TRS Winter 2012/2013 Topics & Report Newsletter. So two retired teachers would be on the poor side of the Wilmette income range.
I doubt that teachers who dedicated their lives teaching children would retire and move to an expensive village near jerks like you who like to denigrate their years of commitment to students by questioning their compensation package.
- wordslinger - Wednesday, Aug 14, 13 @ 3:33 pm:
Low Level, it’s been a long time coming, but they had to get a break from paying creditors in order to maintain any semblance of public services.
The city administration wanted the state to back it’s obligation, but that wasn’t going to happen.
Now, like our friends at Tribune Co, UAL, etc., they can take a breath and look to come to new terms with creditors, including bondholders and employees.
- olddog - Wednesday, Aug 14, 13 @ 4:51 pm:
@ low level - why now, for Detroit? -
I don’t have an answer to your question, but I have another question: Could there be an element of partisan politics involved, like maybe a governor and state legislature dominated by one party and a city dominated by another party?
- wordslinger - Wednesday, Aug 14, 13 @ 5:39 pm:
–Could there be an element of partisan politics involved, like maybe a governor and state legislature dominated by one party and a city dominated by another party?–
There are politics, obviously, but at this point I don’t think it mattered. Michigan wasn’t going to take on the weight of Detroit’s changes, nor was the United States.
I mean, it’s not like Detroit was a bank or something.
Chapter 9 was appropriate. I’m glad Detroit went bankrupt. It’s about time. Corporations don’t wear The Scarlet Letter when they do it. Have you flown United? That’s a bankrupt airline. How’s that feel at 40,000 feet?
I hope Detroit protects their assets like Belle Isle.
And I hope the blood-sucking vampires like Goldman and Wells Fargo — public enemies who recklessly drove the world economy into the ditch — take the haircut of their lives. Scalp, actually.
It’ll never be 1950 in Detroit again, but there will always be a Detroit.
- low level - Wednesday, Aug 14, 13 @ 8:36 pm:
You are close to the answer. An extreme, ideologically motivated city manager was appointed. And this “manager” was enabled by a law passed by the Michigan legislature, signed into law by a very partisan Governor that allows the state to take over any city within the state. Tea partiers love it - it’s their 1st chance to get the unions. The “manager” couldn’t wait to file, once he was appointed.
- wordslinger - Wednesday, Aug 14, 13 @ 9:07 pm:
Low Level, I’m not so sure.
The Goldmans and the Wells Fargos of the world were bleeding the city dry, like payday loan lenders.
Bankruptcy for Detroit gives them a chance to protect assets and maximize service from current revenues while letting the blood-suckers stew for a while and consider how much of a haircut a federal judge will give them.
A crew-cut would be a-ok by me.
Certainly, some folks must see the irony in the fact that Detroit is being pummelled for bankruptcy — with no thought of a federal bailout — while their debt is being held by multinational scumbags who ruined the world economy and had to be bailed out by the American taxpayer?
If bankruptcy is okay for the Tribbies, why not Detroit? Detroit brought a lot more to the table than the Tribbies ever did.
Keep in mind, Detroit is where manufacturing and the middle class was born, where the Arsenal of Democracy was forged to beat the Nazis and the Soviets.
Free people everywhere owe Detroit, big time.
They have it rough right now, but I have their back, always. And they’ll always come back.
- abc123 - Wednesday, Aug 14, 13 @ 9:10 pm:
Norseman, you said “the The AVERAGE pension for teachers is $48,216 …so two retired teachers would be on the poor side….”
That’s the dishonest IEA line. The “average” you cite includes part timers and those who worked only part of their careers as teachers in TRS, who probably therefore have other benefits. I was exactly correct in saying the average pension for a couple teachers who work in TRS until age 58 is over $130k. That’s laid out clearly in TRS annual reports. I say the “jerks” who are endangering smaller pensioners are the ones lying about the numbers.
- abc123 - Wednesday, Aug 14, 13 @ 9:21 pm:
@ low level - why now, for Detroit?
It’s like Mark Twain said when asked how he went bankrupt: “Very slowly, then all of a sudden.” But Chapter 9 won’t happen to Chicago because Illinois law does not permit it. Chicago may go bankrupt in a figurative sense, but it won’t be in a Federal court and it will be chaotic.
- Norseman - Wednesday, Aug 14, 13 @ 9:32 pm:
Wilmette, obviously you didn’t read what i said. I cited my source and it was a TRS document. Your anti-union bias seems to insert IEA in everything.
Why don’t you cite me the specific document you’re referring to. And I’ll take a look. Meanwhile you can go to the TRS site and read my source.
- wordslinger - Wednesday, Aug 14, 13 @ 9:32 pm:
–Chicago may go bankrupt in a figurative sense, but it won’t be in a Federal court and it will be chaotic.–
A figurative sense? What’s that look like, when it comes to municipal bankruptcy?
Does that phrase have any meaning at all? Can you line it up on a spreadsheet for me?
It’s pathetic to watch all the haters talk in abstractions about dollars and sense issues.
You haven’t seen one of them cite a figure or fact, yet. They’re just desperately hopeful for things to go bad for reasons that have nothing to do with finance.
For shame.
I mean, when Orange Co., CA, went bankrupt, that was because of people of color, unions, liberalism and public employees? Disneyland, Anaheim and John Wayne Airport?
Same with Jefferson Co. AL?
- Ruby - Wednesday, Aug 14, 13 @ 10:57 pm:
It is indeed a dark time in Illinois when a lobbying group brags about their influence with bond ratings agencies to drive down the state’s credit rating and drive up the costs to taxpayers.