Chicago Is In Worse Shape Than You Thought

I want to draw your attention to a post at Mike Shedlock’s (Mish’s) place originally written by “Bond Girl” Kristi Culpepper that explains how arcane fund accounting and likely illegal tax breaks make Chicago fiscal predicament even worse than it looks on the surface and that’s bad enough as it is. The post was pointed out in comments by frequent commenter TastyBits. Here’s a sample:

Chicago’s property tax revenues do not go into its general operating fund. These revenues go into a Property Tax Fund, which is used to make debt service payments on the city’s general obligation bonds; make required employee pension contributions; and (to a minor extent) fund the library system. The fund also includes tax increment financing revenues that flow to projects in designated TIF districts.

The city used some of the proceeds from long-term leases of city assets to establish Reserve Funds. The Chicago Skyway reserve funds were established in 2005 in the amount of $975 million. The Metered Parking System reserve funds were established in 2009 in the amount of $1.15 billion. Of these funds, $475 million of the Skyway reserves were designated for budgetary uses. What remained was $500 million for the Skyway; $400 million for the Metered Parking System; and $326 million for a budget stabilization fund.

There has been a structural gap in Chicago’s Corporate Fund budget since at least 2003. Although most governments are required to balance their budgets on a cash flow basis each fiscal year, a structural budget gap can arise when recurring expenditures are greater than recurring revenues. Some of the city’s offering documents suggest that this gap is a legacy of the last economic downturn, but in reality the gap pre-dates the economic downturn by several years. The impact of economic downturns on tax collections tends to have a considerable lag anyway.

So, Chicago’s structural budget gap is a political, not economic, creature. Rather than cut expenditures to a level that could be supported by recurring revenues, the city mostly used non-recurring resources to fill the gap from one fiscal year to the next.

8 comments… add one
  • ... Link

    I guess the thinking is “I’ll be gone, you’ll be gone.” But is that true? The Daley’s were around for a long time, and don’t a great many of your councilman (alderman?) serve essentially as long as they want to? Or is it that the old bosses are counting on being gone, or at least well-cushioned, when the thing collapses?

    Also, makes me doubt Rahm’s judgement if this is the job he wanted. Mayor of Chicago looks worse than being a garbageman in Chicago right now.

  • As I’ve said before I think he thought it was a sinecure (like all his previous jobs).

  • steve Link

    Nice to see Bond Girl is still around. Her explanations of municipal bonds have been among the best I have seen. Sharp one she is.

    Steve

  • Guarneri Link

    To your comment in the other post about capitalized interest and “the end is near,” Dave. When you start visiting the pawn shop to sell off your toll roads and parking meter inventory…….the end is near.

  • Guarneri Link

    Since things seem to be quiescent, someone tell me what’s wrong with this.

    http://www.zerohedge.com/news/2015-04-11/ge-ceo-says-now-perfect-time-be-seller

  • Hmm. If he can’t sell off his loan portfolio I would think that it was self-evident that his asking price is above the market clearing price. There can be a lot of reasons for that including his cost, his price, the composition of the portfolio, and the perceived risk premium. I’m guessing a combination of all of the above.

    Maybe the more important question is why is he trying to cut his loan portfolio to a third of its present volume? Sounds like he’s trying to get GE out of the finance business which is interesting. Would he be doing that if he expected the economy to start growing more rapidly?

  • Guarneri Link

    Heh. Both, in my view.

    Only the market will tell what the loan portfolio is worth, but I’m not thinking they will not be aggressive in the ask price. (Look at the real estate sale to Blackstone and Wells.) Just enough to get that option value, as the market just indicated. I’d call that self dealing at shareholder expense, precisely what Dodd Frank was supposed to prevent. Call me crazy, but I bet we don’t hear a peep. Steve, where are you?

    As for the second question, it’s been made explicit that their role as a strategic financial entity and the associated regulation is causing them to fire sale, er, “strategically exit” the finance business. Thank you Mr Frank. Admittedly, they see the financial landscape as changed permanently, and want to re-focus on industrial endeavors. I have no issue with that. But this is a cut and slash repositioning apparently aimed at just clearing the options value hurdle.

    If our firm did something like this I’d be seeking a discreet apartment in Bolivia. Of course, we don’t make campaign donations……..

  • Guarneri Link

    …..thinking they will not be aggressive….

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