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Chapter 9 Is the Best Bad Option for Chicago’s Pensions. Bankruptcy is inevitable.

Time to exit Nuveen muni CEFs? I think several own Chicago muni bonds and many have large weights in Illinois muni bonds. Nuveen is based in Chicago.

Chapter 9 Is the Best Bad Option for Chicago’s Pensions
Bankruptcy is inevitable. Putting it off only increases the pain for the city’s residents and retirees.
By Mark D. Brodsky
Wall Street Journal
Aug. 28, 2020

Chicago’s pension problems are nothing new. Analysts and observers have known for years that the Windy City’s annual pension contributions were unsustainable. In 2016, the contribution for 2022 was projected to reach nearly $2 billion, 4.3 times what it was for 2014. Despite this gargantuan contribution, the pension plans’ funded ratio was projected to plummet—from a poor 31% in 2015 to an alarmingly low 26% in 2021. I urged Chicago at the time to increase its annual contributions by enough to prevent the funded ratio from dropping below 31%. Doing so would still have left Chicago’s pensions in worse shape than those of any major city in the U.S., but at least the hole wouldn’t get deeper. Chicago’s leaders did not embrace my recommendation.

In the ensuing four years, the situation has gone from very bad to worse. The graph below compares the funded ratios and annual pension contributions as they existed or were projected four years ago to what they are now. The funded ratio swiftly broke through the previously projected low of 26%. By the end of 2018, the funded ratio was 23%. It is now projected to remain under 26% until the end of 2024. And it isn’t expected to get back to 31% until 2031.

...

Chicago has the wherewithal to fund its pensions and provide public services. But it can’t do those things and also service its debt. Chapter 9 of the U.S. bankruptcy code provides a means to cancel a great deal of that debt.

Chicago’s general-obligation debt is arguably junior to its pension liabilities, since the Illinois constitution protects pensions from modification. The general-obligation debt totals about $7 billion and entails annual debt service of around $600 million. In recent years Chicago has kept itself afloat by securitizing its future sales-tax revenues—assigning away those revenues to service bonds issued by a financing entity. Chicago has already issued $3.7 billion of these sales tax bonds. The sales-tax revenues needed to pay those bonds are no longer available to the city to make pension contributions and meet other needs. With regard to the sales tax revenues, these bonds are senior to the pensions.

Chicago could presumably borrow even more by assigning away more sales tax or possibly other revenue streams. Doing so might postpone, but not avoid, a bankruptcy. Bankruptcy is probably inevitable, and putting it off would come at a great price to Chicago’s pensioners and residents. Over time, greater amounts of future revenues would be diverted away for new bond issues, the amount of debt that is senior to the pension liabilities would grow, and junior debt would continue to be paid down.

Chicago is a great city. It wouldn’t be tarnished by a bankruptcy. To the contrary, chapter 9 would enable the city to provide public services and honor its pension liabilities in a way that would otherwise be impossible. This was true before the pandemic, and it is even more true today.

Mr. Brodsky is chief investment officer of Aurelius Capital Management, LP, whose funds are positioned to profit in the event of a Chicago bankruptcy.

 
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Re: Chapter 9 Is the Best Bad Option for Chicago’s Pensions. Bankruptcy is inevitable.

Brodsky's hedge fund may just have to wait.

IL does have a pension problem. But it has been much more severe at local level [some with only 10-20% funding levels]. Last year, hundreds of these were rolled into a state level pension fund. Bigger city pension funds are next to be consolidated and Chicago is BIG. Negotiations between Mayor and Governor are going on and I am not up to date on specific details.

Consolidation won't make underfunding go away, but it would be easier to deal with it in giant state pension funds. And states cannot file for bankruptcy.

YBB
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Re: Chapter 9 Is the Best Bad Option for Chicago’s Pensions. Bankruptcy is inevitable.

My rental unit property taaxes went up 3 times within 10 years. Yet, it is not enough for them because other sales and business tax collections keep going down.

As a lontime part resident of Chicago, if they keep "closing the mag. mile" every week as they are doing now, Chicago will have to file for bankruptcy and get rid of all the burdens. Whether IL does it or Chicago does, they have to something about this. I told my grand daughter two months ago that Graandpa would never move to the "murder capital of the world." My  daughter-in-law did not like it.  I even told my son two decades ago to buy home in Hoffman Estates or Lake county outside of Cook County. Instead he kept buying properties inside Near North, and now the streets are empty. I watched it for three weeks in early August from up above. There is no foot traffic. That means that there is no business for the stores. How are they going to pay the taxes?

My tennant quit two months ago and running at a loss now. Before that, we voluntarily reduced his rent by 33% for two months  because he lost his job.  What is the point in signing a lease from an unemployed person? Those jobs are not returning to Chicago. Yet, I have to pay the taxes. I  can keep going but will stop here.

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Re: Chapter 9 Is the Best Bad Option for Chicago’s Pensions. Bankruptcy is inevitable.

Illinois already has the second highest property taxes in the nation, only NJ residents pay more.  State income taxes are close to 5% and the Governor and legislators want to increase those as well - and the state keeps piling on debt, digging a deeper hole each year.   Of course, the US as a whole is probably running up debt even faster than IL so at some point the dollar must lose its value, and IL might well escape the consequences it deserves.  

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Re: Chapter 9 Is the Best Bad Option for Chicago’s Pensions. Bankruptcy is inevitable.

Well for those of us living in California feeling sorry for ourselves - it could be worse ; )

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Re: Chapter 9 Is the Best Bad Option for Chicago’s Pensions. Bankruptcy is inevitable.


@Beliavsky wrote:

Time to exit Nuveen muni CEFs? I think several own Chicago muni bonds and many have large weights in Illinois muni bonds. Nuveen is based in Chicago.

Chapter 9 Is the Best Bad Option for Chicago’s Pensions
Bankruptcy is inevitable. Putting it off only increases the pain for the city’s residents and retirees.
By Mark D. Brodsky
Wall Street Journal
Aug. 28, 2020

Chicago’s pension problems are nothing new. Analysts and observers have known for years that the Windy City’s annual pension contributions were unsustainable. In 2016, the contribution for 2022 was projected to reach nearly $2 billion, 4.3 times what it was for 2014. Despite this gargantuan contribution, the pension plans’ funded ratio was projected to plummet—from a poor 31% in 2015 to an alarmingly low 26% in 2021. I urged Chicago at the time to increase its annual contributions by enough to prevent the funded ratio from dropping below 31%. Doing so would still have left Chicago’s pensions in worse shape than those of any major city in the U.S., but at least the hole wouldn’t get deeper. Chicago’s leaders did not embrace my recommendation.

In the ensuing four years, the situation has gone from very bad to worse. The graph below compares the funded ratios and annual pension contributions as they existed or were projected four years ago to what they are now. The funded ratio swiftly broke through the previously projected low of 26%. By the end of 2018, the funded ratio was 23%. It is now projected to remain under 26% until the end of 2024. And it isn’t expected to get back to 31% until 2031.

...

Chicago has the wherewithal to fund its pensions and provide public services. But it can’t do those things and also service its debt. Chapter 9 of the U.S. bankruptcy code provides a means to cancel a great deal of that debt.

Chicago’s general-obligation debt is arguably junior to its pension liabilities, since the Illinois constitution protects pensions from modification. The general-obligation debt totals about $7 billion and entails annual debt service of around $600 million. In recent years Chicago has kept itself afloat by securitizing its future sales-tax revenues—assigning away those revenues to service bonds issued by a financing entity. Chicago has already issued $3.7 billion of these sales tax bonds. The sales-tax revenues needed to pay those bonds are no longer available to the city to make pension contributions and meet other needs. With regard to the sales tax revenues, these bonds are senior to the pensions.

Chicago could presumably borrow even more by assigning away more sales tax or possibly other revenue streams. Doing so might postpone, but not avoid, a bankruptcy. Bankruptcy is probably inevitable, and putting it off would come at a great price to Chicago’s pensioners and residents. Over time, greater amounts of future revenues would be diverted away for new bond issues, the amount of debt that is senior to the pension liabilities would grow, and junior debt would continue to be paid down.

Chicago is a great city. It wouldn’t be tarnished by a bankruptcy. To the contrary, chapter 9 would enable the city to provide public services and honor its pension liabilities in a way that would otherwise be impossible. This was true before the pandemic, and it is even more true today.

Mr. Brodsky is chief investment officer of Aurelius Capital Management, LP, whose funds are positioned to profit in the event of a Chicago bankruptcy.

 

Number of problems with the article

1 . as  creatures of the state, A city cannot declare bankruptcy without the states permission. Bridgeport ,CT declared bankruptcy in 1989 but had to withdraw it when CT govt objected.

2. The courts would have to determine whether pension obligations take precedence over holders of GO debt.  Courts could rule Chicago has to fund both by raising taxes. If pensions take priority over GO bonds, both Chicago and IL debt will be downgraded to speculative Grade which would prevent further borrowing by either city or state and bond funds would be prohibited From owning Chicago and IL debt. Chicago could raise taxes to fund both pensions and bonds. If GO bonds do not guarantee first payment then interest rates for all muni bond issuers would drastically increase which would increase amounts states would have to pay to sell bonds.

3. There are creative ways for Chicago to issue debt, e.g., city debt payments could be guaranteed by the state.

other states like NJ and ct have pension deficits but have different ways to solve the problem. NJ can always curtail or eliminate future pension benefit accruals by employees and just fund the benefits that were accrued in prior years. Ct can raise taxes. 

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Re: Chapter 9 Is the Best Bad Option for Chicago’s Pensions. Bankruptcy is inevitable.

merlin_92394505.png

Image from a news item in Chicago Sun Times. Link is here below.

COVID-19 and crime team up against Chicago’s reputation

Many Of Chicago’s Biggest Buildings Sit Virtually Empty

1 Killed, 4 Injured in Shooting Outside Restaurant on Chicago's Far South Side

These are the headline news items from three different news outlets just today.

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Re: Chapter 9 Is the Best Bad Option for Chicago’s Pensions. Bankruptcy is inevitable.

@ECEPROF , those Downtown bridges on Chicago River are up to proactively block demonstrators from Downtown and to protect YOUR condo properties there. Unfortunately, the recent pattern has been that when things happen anywhere in Chicago, demonstrations are in highly visible/high profile Downtown and Magnificent Mile [Michigan Ave] areas. It was terrible that someone came out of a SUV and started shooting at people eating outside of a pancake restaurant on far South side of Chicago.

Rest of the news about office occupancy being 5-20% can be applicable to any major metropolitan center.

YBB
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Re: Chapter 9 Is the Best Bad Option for Chicago’s Pensions. Bankruptcy is inevitable.

Yogi

We all saw the opened bridges live here. My son owns two condos in the circular building on the left - Marina Towers. He does not live there now but renting them. By the way, all businesses will be closed soon if there is no tourism. There are no more tourists there. Even those living there have left town due to the virus. By the way, car traffic was picking up on the 50 exit/entrance ramps (Ohio/Ontario) - main traffic to that area - while we were in early to mid August. The gas station at the corner of Ontario/Lasalle became busy. People were getting food in the McDonald there. I bet all these people are gone now after two weeks of protests there.

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