IBGYBG Comes to Chicago

At the Investor’s Business Daily Nicole Gelinas outlines the city of Chicago’s reprehensible plan for delaying the inevitable:

Chicago is in the throes of a New York-circa-1970s-style fiscal crisis. Abetted by Illinois’ government, the Windy City is adopting one of the borrowing tools that helped New York get its finances in order: a complex municipal bond, structured to protect investors in a possible bankruptcy.

But unlike New York, Chicago and Illinois are using this invention to delay reform.

Chicago has spent two decades digging itself into a hole. Back in 2000, the city had racked up $12.3 billion in debt, in current dollars; now, it owes $20.2 billion. Back then, the debt burden per person was roughly $4,400; these days, it’s $7,500.

Even scarier is what Chicago owes to pensioners: $31.5 billion, up from $5 billion in 2000. Last year, Chicago’s pension funds took in $900 million from the city and its employees and earned nearly $541 million in investment income, but the fund paid out more than $2 billion.

Chicago has less money set aside in its pension funds today than it did a decade and a half ago.

Chicago has zero hope of fixing this mess if it keeps to its current path. Since 2000, it has run a surplus once (in 2002).

The reason that it is reprehensible is that the scheme requires future Chicagoans, of whom there will be fewer, to pay more than would otherwise be the case. The smart, courageous, and decent thing would be to grasp the nettle as me auld mither used to say and deal with the problem now rather than foisting it on those who’ll still be here when the bill comes due.

“IBGYBG” stands for “I’ll be gone; you’ll be gone”. It was allegedly a popular saying among the hedge fund managers who contributed mightily to the financial crisis of 2007-2008. Clearly, the sentiment still thrives among the unscrupulous.

9 comments… add one
  • Guarneri Link

    Sometimes I feel sorry for Dave, who obviously puts a lot of effort into some of these posts, or they are very important topics, yet they don’t generate discussion. Even if a well worn topic I feel compelled to say something. In particular, this one is just mind blowing in what they have done.

    The author states these bonds are “complex.” No they aren’t. They are simple as pie. This technique is the age old workout technique of giving fresh money a preference; First dibs on sales tax revenue. This comes at the expense of other bond holders who, by the way, previously supplied capital on the basis of expected access to city revenues.

    You’d have to read the terms of the old bonds to see if it’s legal fraud, but it’s moral fraud. It also goes by names such as effing the existing bond holders straight up the ass, good and hard. How many times do you think an issuer can get away with this? Once. And I think it could have repercussions sooner than they think. I have previously remarked that my wealth manager, an old line Chicago institution not to be confused with The Southern Trust, and I have laughed at the notion of placing any Chicago munis in my muni-heavy portfolio. Not a chance. Now this? It will be interesting to see how old bonds reprice, and if there is a lawsuit.

    I don’t know if the magnitude of this resonates with readers. There is often bleating and moaning about banks and so on here. But this is pure evil on the part of the government. In the face of overwhelming debt service, just abrogate your responsibility and issue new securities with new rules. I’d like to know the government architect of this, the underwriters and the purchasers.

    This isn’t complicated. It’s no more complicated than your uncle Joe borrowing $20k from you then never repaying, or coming over 10 years later with a grand and saying “were good, right?”

  • In addition the city is selling off its future revenue sources one by one. Parking meters. The Skyway. Sales tax revenue. Chicago gets additional revenue today in exchange for less revenue tomorrow.

    But there’s a larger tax base today than there is likely to be tomorrow. That means that tomorrow fewer people will be responsible for a higher level of debt. What’s next? Selling off property tax revenue? Those and non-parking fees are just about the city’s only remaining sources of revenue.

  • Guarneri Link

    That’s exactly what it is, monetizing the stream to accelerate funds to today. Or less elegantly, a trip to the pawn shop. I think they had sold the SkyWay and parking meters before I left.

    I’ve speculated that they figured a Clinton Admin would give them a Fed bail out. Ooops. I don’t read the Chicago press much anymore, but this should be front page stuff, even as unsexy as it is. Lives and a once great city are at stake. I have friends who are financially astute who now have that last child to senior in high school level, or graduated. Two have moved to AZ. Three more are headed out in a year to FL, AZ and NC. Well healed people who can shoulder the tax burden of 2-6 Everymen. I don’ need a calculator to figure that one out. If Oak Park, the North Shore and downtown want to shoulder the burden for the city or state let them knock themselves out. But these financial train wrecks have a tendency to be on you before you know it, more severe, and with no maneuvering room.

    Casey Jones you better watch your speed……….

  • TastyBits Link

    @Drew

    There are a lot of posts where I never press the Submit button. Among the reasons are: 1. Anybody who has been here for more than two weeks knows my positions. 2. I do not have time to get into a lengthy back and forth. 3. Personal issues.

    Just recently, I was going to comment on a few statements in your comments, but I let it go.

    One of your statements was about the housing crisis and speculators being a large part of the problem. Housing speculators are a problem because the housing prices used as collateral for the loans to purchase the housing collapses, and they cannot repay the loan.

    In many cases, they cannot repay the loan because they do not have enough income to support a 30-year mortgage. These loans are called no-doc (no documentation) or, as @steve calls them, liar’s loans. I had two overly lengthy comments about why no-doc or liar’s loans were not the problem, and this applies to borrower as well as the lender.

    This segues nicely into worthless bond issuers and the unbelievable lenders. The senior bond holders were idiots, and more than likely, they screwed over the senior bond holders at the time of purchase.

    I agree that issuing government bonds that can never be repaid is evil, but the purchasers are no less evil. The purchasers are relying on the government entity to use self-immolating means to repay the loans. The bond holders are facilitating the evil behavior, and I would rate their evilness greater than the bond issuers.

    Being a junkie is bad, but lending the junkie money to purchase drugs is worse. The Chicago City Council, Chicago Public School System, Illinois pension funds, and any other governmental entity can only overspend because somebody is stupid enough to lend them the money they overspend.

    I fail to understand why this is such a difficult concept to grasp.

    (Due to the enormous value of its assets, the ability to tax, the ability to create money, and its exemption from accounting regulations, the US government borrowing is a different beast.)

  • I agree that issuing government bonds that can never be repaid is evil, but the purchasers are no less evil.

    As I’ve said before every post can’t be about every thing. I tend to be more concerned about Chicago because I live here, I know it better, and these decisions and actions affect me and my ability to continue to live here.

    Unlike many people I have options. I’d just prefer not to exercise them.

    Being a junkie is bad, but lending the junkie money to purchase drugs is worse. The Chicago City Council, Chicago Public School System, Illinois pension funds, and any other governmental entity can only overspend because somebody is stupid enough to lend them the money they overspend.

    If the loans were unsecured it would be one thing but the loans are being secured with tomorrow’s revenues.

  • TastyBits Link

    @Dave Schuler

    If the loans were unsecured it would be one thing but the loans are being secured with tomorrow’s revenues.

    Yes, but the security of tomorrow’s revenues is questionable at best.

    As long as they can borrow to replace revenue, they will, but at some point, Chicago will not have enough revenue to repay the secured or unsecured loans. Until then, I suspect that they can move the expenses from one revenue stream to another and allow the secured revenue stream to dry up.

    (Garbage collection services are moved to the park fountain budget, and Chicagoans are charged $0.01 per year for garbage service. That revenue is secured by the bondholders, but it is worthless. It would be a reverse money laundering, and I think that the Chicago politicians could create more schemes in a day than the bondholders could imagine in a decade.)

  • Guarneri Link

    Tasty, I would suggest that underwriting and rating the bonds is a lucrative business, and that much pressure is put on those people by the governing authorities for future business. Sad but true.

    As for loans and inflated collateral values, God did not come down and dictate to anyone to borrow up to the collateral value. And no one says you have to take out a loan, despite your income realities. So many of these people are just as “greedy” as those accused of being greedy, like banks. They borrowed in the hope of a quick buck. 21 is the age to contract. After that, its really on individuals to make their own and live with their decisions. Fraud aside, this isn’t a nursery school we are running here.

    As for Dave, not that he needs my help, but in addition to his fly-by posts he obviously does some material research and puts thought into a number of his posts. I’m just saying it is, shall we say, the quid pro quo to participate with some reflection or, as I’m want to do, some position to mix things up and hopefully generate thought. I’ll stake out positions I don’t really fully believe just for that purpose. And believe it or not, I read almost all the comments here, (I’m a horrible insomniac) sometimes coming away with a modification or expansion of my own views or, heaven forbid, thinking “that view is actually more sound.” Why else come here?

  • TastyBits Link

    As usual, I am stunned that people think lending money to people who cannot repay it is a good idea. In truth, it is a hard money concept.

    When it is actual money being lent, very few uncreditworthy borrowers will exist, but when lending creates the money being lent, the lenders are not quite as concerned about creditworthiness.

    As for greediness, you need to address a certain ER doctor. Until an objective set of standards is established, I refuse to accept the concept of greed as valid. Anybody who wants more than the bare minimum of food, clothing, and shelter is greedy, but wanting the bare minimum is not greedy.

    The ‘Wall Street Banker’ and ‘Welfare Queen’ are both sucking on the government teat. The difference is that money can make government welfare look respectable. It does make me chuckle thinking about sophisticated lenders being duped by simpleton borrowers.

  • Guarneri Link

    It’s not a good idea morally, Tasty. It’s a “good” idea when you have a taxpayer bailout at your disposal. You are ignoring the reality of the environment.

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