New warning from S&P for Chicago: Read it carefully – WP Original

 

By: Mark Glennon*

 

S&P, the rating agency, yesterday issued a a statement warning that Chicago’s surprise runoff election may delay completion of a plan to pay a $600 million pension contribution the city faces for the coming year. Serious as next year’s problem is, however, the statement contains a far grimmer warning. It quantifies just how far off Chicago is from addressing its pension crisis and how inadequate that $600 million is. Here’s the key part:

The city currently only contributes 26% of its annual required pension contribution (ARC) for its four plans. Not paying the full ARC leads to increases in the unfunded liability. The current payment represents 7% of its total governmental funds expenditures. If the city were paying down these liabilities with the full ARC payment today, the contributions would represent 27% of total governmental funds expenditures.

In other words, to properly fund its pensions, the city should be paying almost four times as much into them as it does now. Chicago paid $476 million into its pensions in fiscal year 2014. Next year’s scheduled contribution of $600 million is just the start under the phony, backloaded statutory contribution plan set by Springfield. If S&P’s numbers are right, Chicago should be paying $1.9 billion per year instead of the $600 million scheduled for next year!

 

For some perspective, the city currently raises about $900 million per year from property taxes. So, to cover the gap between the $600 million pension payment the city is scheduled to make and the $1.9 billion it should be making, it would have to more than double the property tax if property taxes were used as the payment source.

 

And S&P’s numbers do seem about right. Last year, using 2013 numbers, the Civic Federation calculated that Chicago was paying only about a third of  what would be required to make a full ARC payment, and unfunded liabilities have jumped since then. A third, a fourth? Whatever. And then there’s the healthcare obligation for pensioners, which is not in those numbers. No, never mind. This has already gotten just plain silly.

 

How do Chicago voters respond? Perhaps by electing Chuy Garcia, who promises to re-open closed schools, put 1,000 more police on the street, and more — all while keeping property taxes flat. Not a serious word about how to pay for anything new, much less the current pension calamity.

 

Not that Rahm doesn’t share blame. Yes, he inherited the crisis and, yes, he made the hard decision by closing schools. But he hasn’t conditioned voters to the reality of what Chicago faces.

 

Blame the local press for that as well, because they’ve consistently understated our problems. So far, they haven’t even reported the S&P warning. The consequence is a clueless electorate.

 

In reality, whoever is elected will somehow morph into a turnaround artist — or he and Chicago will collapse. But hope for serious turnaround discussion in Chicago is now also delayed by six weeks. “Don’t scare the children” will continue for now.

 

On the rare occasions when I find a financial realist who is regularly in the trenches with Chicago voters, I like to ask what those voters understand about the city’s finances. Suzanne Devane, GOP 49th Ward Chicago Committeewoman, said it all when she recently told me, “They have no idea what’s about to hit them.”

 

*Mark Glennon is founder of WirePoints

Updated 4/27/15

 

 

 

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Mike
9 years ago

Remember that Standard and Poor’s changed its rating methodology in 2013 – 2014, with the one year implementation period for the change ending on September 12, 2014. The change in rating methodology resulted in a change to the distribution of the ratings, resulting in greater percentage of bonds being rated AAA & AA, and a lesser percentage of bonds being rated A & BBB. Chicago falls into that lesser percentage of bonds that are now rated in the A category. Chicago bonds now have an A+/Negative general obligation bond rating. A+ is fantastic on the kid’s report card, but in… Read more »

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