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Move Over Detroit - The Fiscal Crisis in Chicago is Far Bigger.
Townhall.com ^ | September 19, 2013 | Mike Shedlock

Posted on 09/18/2013 5:30:22 AM PDT by Kaslin

Move over Detroit. The fiscal crisis in Chicago is far bigger.


Via email, Ted Dabrowski at the Illinois Policy Center writes ...

While all eyes are focused on a solution for Illinois’ state-run pension systems, Chicago’s own debt crisis is looming.

Chicago taxpayers are on the hook for more than $63 billion in pension, health insurance and other debt. That’s the total debt of the city and its sister governments, as well as Chicagoans' share of Cook County debt.

In total, each Chicago household is on the hook for more than $61,000.

Chicago’s pension crisis isn’t new, but Detroit’s bankruptcy has brought national attention to Chicago’s growing crisis. Just a day after Detroit filed for bankruptcy, Moody’s Investors Service downgraded Chicago’s debt by a rare three notches. Chicago is now just four notches away from junk-bond status — and any further downgrades mean the city could face problems borrowing money.

Without pension reform, Chicago Mayor Rahm Emanuel will be forced to raise taxes or dramatically cut government services.

Emanuel knows he can’t raise taxes. Chicago has lost more than 200,000 residents in the last decade and the city’s population is lower now than it was in the 1920s.

To make matters worse, Chicago’s services are already faltering. Chicago Public Schools closed nearly 50 schools this year, forcing children and families to travel across gang lines. Nearly 3,000 school employees have been laid off. And the city’s crime rate is among the worst in the nation.

Higher taxes, taxpayer flight and an inability to provide core services contributed to Detroit's demise — and it’s a trend that Chicago must reverse.

Fixing Chicago's pension crisis will require help from Springfield. Lawmakers need to follow the lead of the private sector and move all workers to 401(k)-style plans for all work going forward — an idea that Emanuel supports as an option for the city's new hires.

Ted Dabrowski
Vice President of Policy

The Hidden Bill

You can view the entire report at The hidden bill: Chicago taxpayers and the looming crisis.

A closer look at the "Hidden Bill" shows the problem is even worse than stated by Dabrowski above.

Pension funds have long assumed unrealistically high investment returns, which make the funds look healthier than they actually are. Moody’s Investors Service now calculates unfunded pension liabilities using more appropriate discount rates.

Under new Moody’s methodology, Chicago’s unfunded pension liabilities are at least $23 billion higher than what’s officially reported. Today, the systems have only 31 cents for every dollar
they should have to make necessary pension payouts in the future.

When summing up Chicago’s total debt, it’s necessary to use the Moody’s calculation of unfunded pension liabilities instead of those officially reported by the city. That’s because the municipal bond market depends heavily on Moody’s ratings when investing in Chicago bonds.

Moody’s based its recent triple-notch downgrade of the city’s debt on the agency’s new methodology for valuing pension shortfalls. The downgrade has led to a collapse in Chicago’s bond prices and a significant increase in its borrowing rates.

Chicago’s credit rating is now only four notches away from junk-bond status. Many institutional investors are not allowed to invest in junk bonds, meaning the city will face significant
pressure in accessing the bond market going forward if this downward trend continues.

Ignoring the Moody’s pension calculation not only understates the severity of Chicago’s debt crisis, but also the true burden that Chicago taxpayers may be forced to shoulder.

If you adjust pension obligations for a more realistic rate of return, the problem looks like this.

Chicago Obligations



Chicago Pension Funding



Four Long Term Solutions

  1. Kill defined benefit pension plans
  2. End collective bargaining for public unions
  3. Institute national right-to-work laws
  4. Scrap Davis-Bacon and all prevailing wage laws


The above long-term solutions will stop the problem from growing as well as ensure labor costs are market-priced, not union-priced.

I wish that was enough but it isn't. Those things will slow the rate of growth of the problem, but cannot address 77% pension underfunding.

Two Short Term Solution

  1. Pension cutbacks
  2. Healthcare benefit cutbacks


Pension and benefit cuts are necessary, but how best to do it?

I propose the burden of pension cuts spread out in an equitable manner with those receiving the highest benefits taking the biggest percentage cuts.

All pension income above a certain cap could be taxed at a very high rate. This would protect the smaller pensioners from massive haircuts.

The alternative, as we saw in Central Falls, Rhode Island Bankruptcy, was an across the board 50% pension haircut.

Someone with a $200,000 pension had it cut to $100,000. Someone with a $25,000 pension had it cut to $12,500.

My proposal would cap the top-end rather than applying uniform haircuts. If one picks the cap carefully, a majority of union members would fare better under my plan than bankruptcy.
The Union Choice

Public unions can scream all they want, but the entire defined benefit pension system is insolvent.
There is no choice other than pension haircuts. There is a choice as to how:

  1. Voluntary (via union agreement)
  2. Involuntary (via bankruptcy)


Bankruptcy Here We Come

Unfortunately, unions are highly unlikely to accept my common sense proposal.

Ultimately, Chicago will play around with superficial remedies just like Central Falls, Detroit, and several cities in California (all of which succumbed to the inevitable).

In the meantime, Chicago will probably follow some other major cities into bankruptcy, such as Oakland and Los Angeles.

Investors better pick their municipal bonds carefully, because some major hits are on the way.



TOPICS: Business/Economy; Culture/Society; Editorial
KEYWORDS: bankrupt; chicago; pensions

1 posted on 09/18/2013 5:30:22 AM PDT by Kaslin
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To: Kaslin

“Investors better pick their municipal bonds carefully, because some major hits are on the way.”

After the GM debacle where Obama unilaterally broke 200 years of law and picked the Union as the winner, I’m astonished there IS a bond market.


2 posted on 09/18/2013 5:34:47 AM PDT by Gen.Blather
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To: Gen.Blather
After the GM debacle where Obama unilaterally broke 200 years of law and picked the Union as the winner, I’m astonished there IS a bond market.

Maybe there are a lot of institutional investors with an inside track, or at least think they do.

3 posted on 09/18/2013 5:36:56 AM PDT by St_Thomas_Aquinas (Isaiah 22:22, Matthew 16:19, Revelation 3:7)
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To: Gen.Blather
"After the GM debacle where Obama unilaterally broke 200 years of law and picked the Union as the winner, I’m astonished there IS a bond market."

You and me both, my friend. And no one ever talks about it, ever.

4 posted on 09/18/2013 5:40:52 AM PDT by Former Proud Canadian (The IRS--a softer Gestapo)
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To: St_Thomas_Aquinas

“Maybe there are a lot of institutional investors with an inside track, or at least think they do. “

These institutional investors who think they have the inside track should talk to the unions who supported Obamacare thinking they’d be immune to it.


5 posted on 09/18/2013 5:54:04 AM PDT by Gen.Blather
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To: Kaslin

The can kicking is about to end.
The road is ending - in a dead end.

I await the rape of the productive sectors Nationally to pay for the total failures of liberal lunacy.
Its coming. Hide your wallets.


6 posted on 09/18/2013 5:58:15 AM PDT by bill1952 (Choice is an illusion created between those with power - and those without)
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To: bill1952

It won’t be to long until 401Ks are converted into “Patriot Bonds”.


7 posted on 09/18/2013 6:03:58 AM PDT by glorgau
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To: glorgau

Sounds like a great add on for directive 10-289.


8 posted on 09/18/2013 6:10:28 AM PDT by wally_bert (There are no winners in a game of losers. I'm Tommy Joyce, welcome to the Oriental Lounge.)
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Comment #9 Removed by Moderator

To: jsanders2001

> Ultimately, Chicago will play around with superficial remedies just like Central Falls, Detroit, and several cities in California (all of which succumbed to the inevitable).

In the meantime, Chicago will probably follow some other major cities into bankruptcy, such as Oakland and Los Angeles.

Hmmm....what common denominator do I see here? Oh yeah I’m not allowed to speak the truth in a PC world (but they will allow all the lies you can muster if it excuses their irresponsible / corrupt actions)


10 posted on 09/18/2013 6:30:02 AM PDT by jsanders2001
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To: Kaslin

I bet you dollars to donuts Kansas City is on the same path


11 posted on 09/18/2013 6:37:57 AM PDT by yldstrk (My heroes have always been cowboys)
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To: Kaslin

I’m from Chicago. The city is definitely in a transition. On the plus side, despite what the media says, murders are down to the lowest level since the early 60s.


12 posted on 09/18/2013 6:43:10 AM PDT by nikos1121 (“To err is human; to forgive, divine.” Alexander Pope (1688-1744) English poet)
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To: Former Proud Canadian

there really isn’t

the bonds are making zilch for people


13 posted on 09/18/2013 6:43:25 AM PDT by yldstrk (My heroes have always been cowboys)
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To: Kaslin

Chicago, like Detroit will not change. They will go to bankruptcy kicking and screaming all the way, while the city denigrates further. Obama or his successor will bail them out and the cycle will continue.


14 posted on 09/18/2013 7:06:17 AM PDT by No_More_Harkin
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To: Kaslin

My mom had a part time job for a number of years in Chicago, working at a Senior Center, administering a meals program. When she retired her pension checks were SIGNIFICANTLY larger then her pay had been when working. In addition to a health plan that was zero cost and payed 100% for prescription drugs.


15 posted on 09/18/2013 7:09:00 AM PDT by Kozak ("Send them back your fierce defiance! Stamp upon the cursed alliance! To arms, to arms.....")
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To: glorgau
"It won’t be to long until 401Ks are converted into “Patriot Bonds”."

You're definitely on to something here. I've thought all along that if someone (99.9% sure that this will be a liberal dem) proposed taking all of the retirement plans, 401Ks, etc., from the American people and in exchange everyone gets a $3-4,000 check each month when they retire that more than half the population would gladly go along with the scheme. Of the remaining 50% most would find that revolting or protesting would take too much effort and cut into their time watching X-Factor, Duck Dynasty, and so on. I'm surprised it hasn't happened yet as they could do it easier than they think!

16 posted on 09/18/2013 7:26:26 AM PDT by aegiscg47
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To: Kaslin
Chicagoans continue to elect DIMs and LIBs. So... Bwahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahaaaaaaaaaaaaaaaaaaaaaaaaaa!
17 posted on 09/18/2013 7:27:09 AM PDT by hal ogen (First Amendment or Reeducation Camp?)
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To: aegiscg47

and I am 99% sure just enough GOPers will cross over to make it pass. Maybe not the first time it comes up though


18 posted on 09/18/2013 7:28:51 AM PDT by GeronL
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To: Kaslin
Moody's downgraded Chicago Debt 3 Notches (just 4 steps above junk)

Move over Detroit....

19 posted on 09/18/2013 8:03:16 AM PDT by GOPJ ( Politicians who fear the people seek to disarm them. - - Bill St. Clair)
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To: GOPJ
This, IMHO, explains why Bill Daley decided NOT to run for governor of Illinois, yet pointedly said that Quinn does not deserve to be re-elected.

Daley would win a primary, and the general, easily...but who wants to run to be the next,and LAST Captain of the Titanic..and have to battle the Democrats core constituencies, teachers, govt employees, welfare, etc to try and get any reforms through.

I think this means that the crisis in much worse than we think..and will blow up very soon.

20 posted on 09/18/2013 8:29:48 AM PDT by ken5050 (According to Dick Lugar, I'm a "random outlier." Woo Hoo!!!!)
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To: ken5050

It does sound like a reason... and yeah, the end could be closer than we think... Thanks for sharing.


21 posted on 09/18/2013 8:44:42 AM PDT by GOPJ ( Politicians who fear the people seek to disarm them. - - Bill St. Clair)
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To: Kozak

>>When she retired her pension checks were SIGNIFICANTLY larger then her pay had been when working.<<

Taking inflation into consideration, that is the way retirement should be planned for.


22 posted on 09/18/2013 9:06:02 AM PDT by B4Ranch (AGENDA: Grinding America Down ----- <<http://vimeo.com/63749370)
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To: B4Ranch

Nonsense. No private firm would pay a pension greater then the salary the person was earning while actually working. I’m not saying the payments increased with inflation, I’m saying the week after she retired she noticed a significant increase. That’s just crazy.


23 posted on 09/18/2013 11:26:04 AM PDT by Kozak ("Send them back your fierce defiance! Stamp upon the cursed alliance! To arms, to arms.....")
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To: Kozak

I retired 18 years ago. My income now, from my pension plan and the private retirement investments I made before I retired are paying me twice what I normally received as a paycheck during the last five years I was working. I planned it that way. It wasn’t an approved plan, it was self designed for the future that I saw beyond the horizon thirty years ago.

Am I lucky? Darn right I am because I saw beyond the then failing SSI checks that most people attempt to survive on. I scrimped and saved while I was working so that I hopefully wouldn’t have to during my retirement years and it worked.


24 posted on 09/18/2013 12:16:05 PM PDT by B4Ranch (AGENDA: Grinding America Down ----- <<http://vimeo.com/63749370)
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To: yldstrk

Here’s the blunt truth. Out of the top twenty cities in America....all are in some sort of financial ailment. I would probably say that fifteen are ten years away from being a Detroit, and the remaining five are probably twenty years away.

Personally, I don’t see how you avoid this unless you stop the pension and healthcare cost spiral by city management folks.

I would also recommend that all folks sit down and read the Detroit Free Press examination of how Detroit came to this end-point...posted about a week ago on their site. There were signs in the 1980s...when property values started to slide and folks were leaving town (for the burb’s). If they had reacted then....they would have pushed the bankruptcy back another decade or two. If you see that your town’s population has peaked, property values are slipping for a 2nd consecutive year....you need to trim city cost and prepare for a dry-spell.


25 posted on 09/18/2013 11:27:17 PM PDT by pepsionice
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