Chicago's shell game

How Chicago has used financial engineering to paper over its massive budget gap

Two administrations have:
  • Used long-term debt to finance everyday expenses and maintenance;
  • Used long-term debt to finance judgments and settlements, including police brutality cases, and retroactive wage increases and pension contributions for its unionized employees;
  • Restructured the city’s existing debt to extend the maturities on its bonds far out into the future in order to avoid having to pay the debt as it was coming due;
  • Borrowed more money than it needed in order to make payments on the bonds its was issuing to avoid debt service expenses, essentially using debt to pay debt; and
  • Possibly used the city’s portfolio of interest rate derivatives as an ATM.
Comment: "Conjurer Bosch" by Hieronymus Bosch (circa 1450–1516). See wiki on shell game. Next decade's Detroit!


  1. Long term debt for current expenses? Can we rename the city "Enron"?

    One would figure that after the scheme of using one's home as an ATM to fund current expenditures collapsed in 2008, people would have taken note, but apparently Chicago's aldermen have no more wisdom in this area than they do about what happens when the law-abiding can shoot their attackers.

  2. More: BROKEN CITY - Rahm Emanuel and the unraveling of Chicago.

    Chicago is suffering from a severe fiscal crisis. Like plenty of other municipalities, Chicago lacks the revenue to pay its bills, particularly its pension obligations to city workers. According to a 2013 Pew report, 61 other U.S. cities face similar difficulties, but Chicago's situation is one of the worst. "Voters must realize we are facing the greatest economic crisis since the Great Depression," says Roosevelt University's Paul Green, the doyen of Chicago political experts. "If something doesn't happen, the city is beyond the abyss."

  3. For Some Bond Investors, Chicago Isn’t Their Kind of Town:

    The pension gap in Chicago has some analysts warning the city could in a decade or more face the same fate as Detroit, which also had pension shortfalls before it filed for bankruptcy protection in 2013. Although Chicago’s economy is more robust, some investors said Chicago needs to address its pension situation.

    “Chicago is Detroit 10 to 15 years from now, if they do not deal seriously with this pension problem,”

  4. Next Stop for Chicago: Emergency Financial Control Board:

    So a cut to junk may well be in the cards, and with it diminished and eventually lack of access to capital. Chicago has already creatively used, and some would say abused, the municipal market to subsidize city operations,

  5. Moody's downgrades Chicago debt to 'junk' with negative outlook:

    Moody's downgraded Chicago's credit rating down to junk level "Ba1" from "Baa2."

    The announcement, which the ratings agency released Tuesday afternoon, cited a recent Illinois court ruling voiding state pension reforms. Moody's said it saw a negative outlook for the city's credit.

    Following that May court decision, Moody's said it believes that "the city's options for curbing growth in its own unfunded pension liabilities have narrowed considerably."

    "Whether or not the current statutes that govern Chicago's pension plans stand, we expect the costs of servicing Chicago's unfunded liabilities will grow, placing significant strain on the city's financial operations absent commensurate growth in revenue and/or reductions in other expenditures," the agency said in a release.

  6. Chicago Faces $2.2 Billion Bank Payout After Rating Cut to Junk:

    Chicago may have to pay banks as much as $2.2 billion after Moody’s Investors Service dropped its credit rating to junk, deepening the fiscal crisis in the third-largest U.S. city.

    The company’s decision Tuesday to cut Chicago’s $8.1 billion of general obligations two ranks to Ba1, one step below investment grade, allows banks to demand that the city repay debt early and exposes it to fees to end swaps contracts, Moody’s said in a statement. JPMorgan Chase & Co., Barclays Plc and Wells Fargo & Co. are among the city’s bankers.

    The downgrade adds to the financial pressure on Chicago, which was already the lowest-rated of any big U.S. city except Detroit. It follows an Illinois Supreme Court ruling last week that safeguards retirement benefits, casting doubt on Chicago’s ability to curb its $20 billion pension-fund shortfall.


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