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Fitch: Back off bankruptcy talk

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Illinois

* From an unusual press release…

Recent developments in Illinois and New Jersey are lessening the chances of state intervention that could result in better outcomes for bondholders than allowing distress to lead to bankruptcy, Fitch Ratings says. We believe efforts to resolve looming budget deficits and ensure the affordability of long-term obligations would be more productive than focusing on easing laws or practices to allow bankruptcy.

Illinois governor Bruce Rauner recently proposed granting the authority to local governments to file a Chapter 9 petition. The proposal is similar to a law introduced by a state representative last fall. It supports Fitch’s view that the needs of a distressed municipality are a better indication of the possibility of bankruptcy than whether current state law allows it. Current Illinois law bars local governments with populations over 25,000 from filing a Chapter 9 petition.

Further fueling concerns about the credit quality of Chicago Public Schools (CPS), Governor Rauner said this week that he fears the district may need bankruptcy as a solution to its large budget imbalance. According to CPS analysis, their reserves will likely be fully depleted by the end of fiscal 2016.

In New Jersey, the recent appointment of corporate restructuring experts to assist Atlantic City in resolving the city’s fiscal crisis appears at odds with the state’s strong history of aiding local governments to prevent the type of stress that could lead to bankruptcy. Of US states, New Jersey has historically provided among the strongest levels of early intervention to local governments with financial strain.

Fiscal intervention mechanisms vary by state. Most focus on helping local governments recover from distress, rather than preventing it. Many can approve or reject financial plans, budgets, and certain government contracts under state control. Their powers, however, are constrained by laws governing labor contracts, benefits including pension obligations, and service provision. Fitch believes this limits their ability to remediate financial distress.

posted by Rich Miller
Tuesday, Apr 21, 15 @ 8:32 am

Comments

Translation: if you add the risk factor of possible bankruptcy, everyone gets downgraded and you’ll all get whacked in the muni market. That will cost you a lot of money.

Comment by Wordslinger Tuesday, Apr 21, 15 @ 8:37 am
“Who”…”who” says this is bad? - the Owl Sandack.

Mayor Sandack probably agreed, but Owls, they don’t want $&@#% problems, right Owl Sandack? Exactly right…

Muni bankruptcy isn’t cashin’ in, Governor. Tell the Owl.

Comment by Oswego Willy Tuesday, Apr 21, 15 @ 8:45 am
Sounds like Fitch is worried the bondholders will end up taking a haircut if bankruptcy becomes an option and is trying to get in front of the issue.

Comment by RNUG Tuesday, Apr 21, 15 @ 8:49 am
You can abide by the idea that honesty is dangerous if you want, but like a sun-times editorial said yesterday, If anybody knows how to save CPS from bankruptcy, the whole city would love to hear it. Where’s that way, people?

Comment by Anonymous Tuesday, Apr 21, 15 @ 8:52 am
I can’t believe Bankruptcy (bailout) is even an option worth discussing. Whatever happened to governments taking responsibility for their actions? Shameful.

Comment by Stones Tuesday, Apr 21, 15 @ 8:53 am
Isn’t Governor Rauner suppose to be the hero that leads us out of how horrible Illinois’ fiscal mess is?

Maybe Fitch didn’t get the memo(?)

Maybe Fitch needs a $20 million Fund to beat them too?

Sonny has a new enemy; anyone with fiscal sense.

Sonny running out of friends?

Comment by Oswego Willy Tuesday, Apr 21, 15 @ 8:53 am
Perhaps Gov Moneybags is shorting in the muni market?

Comment by Arnold Ziffle Tuesday, Apr 21, 15 @ 8:54 am
===If anybody knows how to save CPS from bankruptcy, the whole city would love to hear it. Where’s that way, people?===

If you can make it Comstitutional…that would be great…

Rauner wanted the gig, Rahm ran for re-election. Sometimes, no, all the time, governing is difficult.

Comment by Oswego Willy Tuesday, Apr 21, 15 @ 8:56 am
==If anybody knows how to save CPS from bankruptcy, the whole city would love to hear it. Where’s that way, people?==
Raise property taxes and reduce TIFs.

Comment by Robert the Bruce Tuesday, Apr 21, 15 @ 9:10 am
Wordslinger, very good point. Allowing bankruptcy lowers the tide for all boats in Illinois. It signals to creditors that reduced or non-payment is a possibility.

I’ve always wondered why Fitch, Moodys, etc. wouldn’t apply the same logic to the State exercising police power to reduce their pension obligation. Why wouldn’t that be a signal to creditors that you aren’t safe.

It never helps when the Governor of the State denigrates the fiscal health of local government. Would be better if he provided consult, encouragement, and regulatory relief/options to resolve budget imbalance.

Comment by archimedes Tuesday, Apr 21, 15 @ 9:13 am
– save CPS from bankruptcy–

What makes you think a judge would accept a CPS bankruptcy petition, given the district’s property tax base and rate?

Comment by Wordslinger Tuesday, Apr 21, 15 @ 9:14 am
Fitch is telling our BUSINESSMAN governor that one of the planks of his turnaround agenda is ROTTEN.

Comment by Norseman Tuesday, Apr 21, 15 @ 9:28 am
Businesses may need bankruptcy to return to profitability. Individuals may need bankruptcy to allow some of their creditors to be paid. But governmental units have the power of taxation — unless they don’t want politicians to be held accountable and they want their vendors, employees & pension systems to bare the whole cost. Really fair, not. And not responsible governance.

Comment by Diogenes in DuPage Tuesday, Apr 21, 15 @ 9:39 am
Rauner’s push for a change in state law to permit bankruptcy will hurt the muni credit rating. When the state credit rating was downgraded under Quinn, Republicans were merciless in their criticism. So far, they are remarkably quiet. Apparently some downgrades are less objectionable than others.

Comment by nona Tuesday, Apr 21, 15 @ 9:51 am
====If anybody knows how to save CPS from bankruptcy, the whole city would love to hear it. ==
If Chicagoans paid the same property tax rate as their suburban counterparts, CPS would be in the black. There is a 50% difference in the rate between Chicago and, say, Hoffman Estates.

Comment by nona Tuesday, Apr 21, 15 @ 9:52 am
Do not confuse an unpopular option (raising taxes) with an impossible option. If municipalities are allowed to simply file for bankruptcy the long term impact on investor confidents in munis will be forever shaken. The consequences far outweigh the benefits. The notion of bankruptcy is floated by the same crowd that believes all fiscal problems can simply be fixed by slashing spending with no consideration given to raising revenue.

Comment by pundent Tuesday, Apr 21, 15 @ 10:03 am
Yank the LGDF and cap the property tax and tell me how a number of munis are not going to need bankruptcy.

Comment by Shemp Tuesday, Apr 21, 15 @ 10:06 am
Once again, Bruce Rauner isn’t being a governor and governing when he suggests bankruptcy. He really needs to contact someone who has been a governor so that could perhaps buy a clue.

Comment by VanillaMan Tuesday, Apr 21, 15 @ 10:20 am
“What makes you think a judge would accept a CPS bankruptcy petition, given the district’s property tax base and rate?”
—————-

First off, let’s make clear that the bankruptcy court will accept all reorganization plans for submittal to the court. It’s rare when the court would not even accept a reorganization plan for consideration (as long as that party has an interest).

What plan the court would select, well, who knows.

If the court would select a plan with a proposed property tax increase? - well, they could. They have not to date, because they haven’t had anything like that come to them. Not to say it couldn’t happen.

Comment by Judgment Day Tuesday, Apr 21, 15 @ 10:28 am
JD, my point is, a muni can’t just walk into court and automatically expect bankruptcy protection when they have the ways and means to meet their obligations.

Comment by Wordslinger Tuesday, Apr 21, 15 @ 10:33 am
So here’s the problem with CPS raising property taxes. They can’t. They have a massive hole in the upcoming budget, and they are covered by PTELL, so they are limited to increasing their extension by CPI.. So their only option is to put a referendum on the ballot, but there’s not going to be an election soon enough to cover the gap.

Comment by Juice Tuesday, Apr 21, 15 @ 10:35 am
Lousy CPS mis-management deserves bankruptcy.. Last 2 years CPS budget in the red over $$ 900 million dollars each year
Chicago wants state help to bailout ..LOL
Rauner is right

Comment by better days Tuesday, Apr 21, 15 @ 10:48 am
BD, you’re missing the point. If the bankruptcy option becomes law, every muni in the state is going to get whacked in the market to account for the new risk factor.

That will cost you money. How much is feeding your antipathy to the Chicago schools worth to you?

Comment by Wordslinger Tuesday, Apr 21, 15 @ 10:53 am
Bankruptcy for governments is as absurd as saying corporations are people w/ First Amendment rights…

Comment by D.P.Gumby Tuesday, Apr 21, 15 @ 10:55 am
Fiscal intervention mechanisms vary by state…. Their powers, however, are constrained by laws governing labor contracts, benefits including pension obligations, and service provision. Fitch believes this limits their ability to remediate financial distress.

So in other words, abrogating other contracts (for salaries and pensions) is a better solution than bankruptcy. You see, bankruptcy is a messy process where everyone, including the top 1% that hold virtually all of the tax-exempt municipal debt, will get their oxen gored, whereas if we could only slash salaries and pensions and stay out of bankruptcy we could spare these poor, downtrodden 1%ers entirely and focus all of the adjustment burden where it properly belongs - on the middle class.

All snark aside, as a pension recipient I am actually encouraged that the top 1% are probably our natural allies on the bankruptcy issue, because bankruptcy is probably the biggest threat that we face in the long term to receiving what we are owed.

Comment by Andy S. Tuesday, Apr 21, 15 @ 11:25 am
I’m a bit confused.

The first paragraph clearly states that Fitch thinks allowing bankruptcy is bad. But the second paragraph seems to approve of legislation to make it easier for municipalities to file bankruptcy. (”[The proposed bill] It supports Fitch’s view that the needs of a distressed municipality are a better indication of the possibility of bankruptcy than whether current state law allows it.”)

Am I just reading it wrong? (No jokes about needing education funding to pay for my reading classes!)

Comment by the Other Anonymous Tuesday, Apr 21, 15 @ 12:53 pm
“Am I just reading it wrong?”

They used some stilted phrasing. They are trying to convey that the fact that bills to change the law are being discussed means that pointing to the State Law prohibition on chapter 9 filings is less persuasive than the actual financial position of the subject Munis–because state law can be changed, analysts need to look at the numbers, not say “well, state law sez they can’t file, so they won’t”.

Comment by Chris Tuesday, Apr 21, 15 @ 1:15 pm
ps:

That is contra to Word’s initial post in this thread.

Comment by Chris Tuesday, Apr 21, 15 @ 1:16 pm
“I’ve always wondered why Fitch, Moodys, etc. wouldn’t apply the same logic to the State exercising police power to reduce their pension obligation. Why wouldn’t that be a signal to creditors that you aren’t safe.”

Me too.

Comment by Qui Tam Tuesday, Apr 21, 15 @ 1:36 pm
Qui tam- the bond rating agencies assess the ability of the issuer to pay interest and principal.. Reform pensions and the State and City bond ratings get improved. End of story

Comment by Sue Tuesday, Apr 21, 15 @ 2:23 pm
Sue - A good way to reform the pension systems is to pay the state’a share of the promised pension.

Comment by Huh? Tuesday, Apr 21, 15 @ 2:57 pm
==Qui tam- the bond rating agencies assess the ability of the issuer to pay interest and principal.. Reform pensions and the State and City bond ratings get improved. End of story==

Except you left something out. The contracts clauses of the federal and state constitution prohibit the so-called “reforms” that would reduce pension rights already earned. The “police powers” exception to the contract clause prohibition, as construed by the US Supreme Court, requires contract impairments under that exception to be tailored to the emergency, impair contracts only to the extent necessary, and not discriminate. All of which means that, if the state or some local government can assert police powers to reduce earned pension rights because it’s broke, it can and probably must reneg on its bond obligations, too.

Comment by Anon. Tuesday, Apr 21, 15 @ 3:09 pm
Sue, if the bond rating agencies believe that abrogation of pension contracts will improve their position they are incredibly myopic. Once the State establishes the principle that it can break contracts (even outside of bankruptcy)whenever it claims it is in the public interest, what will prevent it from going after the bondholders in 5-10 years? I bet a majority of them are from out of state and virtually all of them have high incomes (it makes no sense to hold munis in the first place if you are not in a relatively high tax bracket) - this will make them very easy targets indeed. The oft-quoted words of Martin Niemöller (First they came for the Socialists….) come to mind.

Comment by Andy S. Tuesday, Apr 21, 15 @ 3:20 pm
==Reform pensions and the State and City bond ratings get improved. End of story==

Glad things are so simple in your world. In the real world things are a bit more complicated. End or story.

Comment by Demoralized Tuesday, Apr 21, 15 @ 3:23 pm
Some stellar leadership and savvy business sense from the governor with his bloviations about a CPS bankruptcy right before they issued $296 million in bonds today.

Way to work it for the taxpayers, chief!

Thankfully, a rational and good-faith analysis was offered prior to the sale by MMA, which gave the governor the back of their hand.

“Regardless of statements by the governor, Chapter 9 is a likely low probability outcome, allowing for a less cynical reading of CPS otherwise strong pledged security,” MMA wrote Monday….”This security represents only minimal payment default risk,” Monday’s outlook piece read. (April 20 Bond Buyer).

Isnt that swell — a cyncial, loudmouth Illinois governor undermining an Illinois muni right before they go to market. Call him Bad Faith Bruce.

Comment by Wordslinger Tuesday, Apr 21, 15 @ 8:02 pm
bankruptcies?

Rauner, Walker and assorted other GOP ideologues are smitten with the fever to do quick fixes, because their bosom buddies the gazillionaire crew-of-capilalists keeps repeating how smart they are, how they need to implement cut-cut-cut changes for every problem facing government.

Perhaps Rauner IS shorting in the muni market, or aiding and abetting the guys gathered round to plan that.

————–
1. KS revenues lower than expected http://www.kansascity.com/opinion/opn-columns-blogs/yael-t-abouhalkah/article19078119.html

2. KS paid Arthur Laffer $75k for this folly http://www.kansas.com/news/politics-government/article1084749.html

3. WI
Peter Barca: GOP tax breaks 12 times larger for top earners http://www.politifact.com/wisconsin/statements/2014/nov/14/peter-barca/peter-barca-gop-tax-breaks-12-times-larger-top-ear/ via @PolitiFactWisc

4. WI
Wisconsin ‘dead last’ in the Midwest in creating jobs? http://www.politifact.com/wisconsin/statements/2015/mar/16/mark-pocan/wisconsin-dead-last-midwest-job-creation/ via @PolitiFactWisc

5. MN vs WI
Minnesota economy beats Wisconsin: 7 charts, 1 table http://blogs.mprnews.org/newscut/2015/01/minnesota-economy-beats-wisconsin-7-charts-1-table/ via @mprnews

Comment by zonz Tuesday, Apr 21, 15 @ 8:30 pm
Word:

Need to add this:

“Today a $295.7 million bond offering by the beleaguered Chicago Board of Education hit the market.

The Yield Hit 5.63%.

That is 285 basis points higher than Municipal Market Data’s benchmark triple-A scale.”

Doubt that’s due to Rauner’s comments. Probably more due to everybody taking risks to get yield, regardless of how dangerous. Thanks Federal Reserve….

Counterpoint - Link is: http://globaleconomicanalysis.blogspot.com/2015/04/yield-on-chicago-school-bond-sale-hits.html

Comment by Judgment Day (on the road) Tuesday, Apr 21, 15 @ 11:35 pm
==You can abide by the idea that honesty is dangerous if you want, but like a sun-times editorial said yesterday, If anybody knows how to save CPS from bankruptcy, the whole city would love to hear it. Where’s that way, people?==

1. Increase revenue preferably in a progressive way. I’d like to see a small Chicago income tax like John Arena has championed or a transaction tax.

2. Reduce the TIF slush fund

3. Open CPS books and bring some accountability. Since 2010, they’ve reduced the number of employees at Central Office by over 100%. How is that even possible?

Comment by Carhartt Representative Wednesday, Apr 22, 15 @ 7:55 am