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miercuri, 10 iunie 2015

marți, 9 iunie 2015

Mish's Global Economic Trend Analysis

Seven Charts Explain Why Chicago Bonds Rated Junk
Volcker Sounds Alarm Over States' Budget Gimmicks, Pension Assumptions
Greek "Paperology"; Obama Pressures Greece; Proposal Dismissed by Creditors as "Vague Rehash"; Dismal Choices
At Least Two More Illinois Cities Poised for Bankruptcy

Seven Charts Explain Why Chicago Bonds Rated Junk

Posted: 09 Jun 2015 10:52 PM PDT

Looking for a reason Chicago bonds are rated junk?

This guest post by Michael Johnston at Fixed Income Database explains why Chicago is junk in seven easy to understand charts.

Chart #1: Massive Debt Burden

Simply put, Chicago is shouldering an enormous amount of debt. By some calculations, the city is on the hook for as much as $63 billion when pensions, long-term notes, and health insurance obligations are included. That amounts to a staggering $23,300 for every inhabitant of the city, representing a huge chunk of the annual income for the city's residents and nearly 10 times the size of the per capita annual budget.

Data Sources: Illinois Policy Institute, 2010 Census, Chicago Budget. Per capita income estimate is for Cook County.

Chart #2: Growing Payments

While the current state of the city's balance sheet is dismal, the real problem relates to what is expected to develop over the next decade. Chicago pension plan payments are expected to double from 2014 to 2015, and will then continue to rise for another decade before they begin to decline. By the time payments peak in 2026, they will be four times the 2014 level.

Data Source: Moody's estimates

Chart #3: Limited Taxing Ability

The easiest way for a government to boost revenues is through tax increases. For cities, property taxes are often a primary revenue stream. While it is certainly possible that Chicago will raise property taxes — in fact, it's a near certainty — there will be a limit to the increases possible. Illinois residents already pay the second-highest property taxes in the country.

Data Source: WalletHub

Chart #4: Unrealistic Expected Rates of Return

The city's pension liabilities have ballooned in part as a result of unrealistic expectations for the returns on the assets. For fiscal 2013, Chicago's various pension plans were assuming annual rates of returns ranging from 7.5 percent to 8.25 percent.

Unfortunately, the actual performance has failed to live up to these lofty expectations. The Municipal Employees' Annuity & Benefit Fund of Chicago (MEABF) reported a 10-year average return of just 5.6 percent as of 2014. The Laborers & Retirement Board Employees' Annuity & Benefit Fund of Chicago (LABF) reported a "gross of fees" return of 6.3 percent for the 10 years ended March 31, 2015.

10-year returns as of 12/31/14 for MEABF and 3/31/15 for LABF. 5-year returns as of 12/31/13 for Police.

When the actual results fall short of expectations for an extended period of time, the gap between assets and liabilities can begin to rapidly grow. That's exactly what has happened to Chicago's pension plans; despite paying millions of dollars in fees — the police pension fund doled out over $8.6 million to managers and consultants in 2013 — returns have fallen far short of expectations.

Chart #5: Compounding Unrealistic Rates of Return

The disconnect between the expected returns used by Chicago's pension funds and reality are disappointing. But when they continue over an extended period of time, this gap can spell economic disaster. The difference between 7.75 percent and 5.60 percent in annual returns may not seem like much, but when these rates of return compound, a massive gap appears

The MEABF pension fund has been assuming that its approximately $5 billion of assets will grow to about $9.8 billion over the course of 10 years. Based on historical returns, it will actually grow to $8.2 billion — leaving a gap of nearly $600 per resident. This same scenario is playing out across multiple pension funds, for even longer periods of time.

Chart #6: Accelerating Expenses

Although Chicago has increased revenue through a number of different tax strategies, expenses have been rising considerably in recent years as well.

Data Source: City of Chicago Annual Budget for 2013, 2014, and 2015

Chart #7: Actual Junk

While Chicago's budget issues are largely related to an underfunded pension system, the city isn't exactly frugal in the way it spends money for other services. Many of the day-to-day aspects of city operations are extremely inefficient and expensive relative to other major metropolitan areas.

Data Source: Citizens Budget Commission

Reducing the cost of trash pickup obviously won't solve all of Chicago's problems; this service accounts for only a small fraction of the city's budget. But the cost differences relative to other major American cities highlight the general lack of fiscal discipline that plagues the city.

The above charts and analysis courtesy of Michael Johnston at Fixed Income Database.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

Volcker Sounds Alarm Over States' Budget Gimmicks, Pension Assumptions

Posted: 09 Jun 2015 02:25 PM PDT

The Volcker Alliance, founded by former Fed chairman Paul Volcker has sounded an alarm over budget gimmicks. The alliance seeks Truth and Integrity in State Budgeting.

In the report, the Volcker Alliance examines in detail the budgeting practices of California, New Jersey and Virginia, assessing the effectiveness of each state's practices.

The report highlights the need for effective and transparent budgeting practices by "shining a spotlight on opaque and confusing practices and by identifying more appropriate approaches" when creating state budgets and fiscal policy.

Executive Summary

EVEN AS THE REVENUE OF STATE GOVERNMENTS in the United States recovers from the longest economic downturn since the 1930s, many states continue to balance their budgets using accounting and other practices that obscure rather than clarify spending choices. These practices make budget trade-offs indecipherable, lead to poorly informed policy - making, pass current government costs on to future generations, and limit future spending options. Further, they weaken the fiscal capacity of states to support the cities and counties that depend on their aid.

In 49 states, "balanced budgets" are required by constitution or by statute; Vermont, the sole exception, follows the practice of its peers. In truth, however, there is no common definition of a balanced budget, and many states resort to short-term sleight of hand to make it appear that spending does not exceed revenue. The techniques include shifting the timing of receipts and expenditures across fiscal years; borrowing long term to fund current expenditures; employing nonrecurring revenue sources to cover recurring costs; and delaying funding of public worker pension obligations and other postemployment benefits (OPEB), principally retiree health care.

While these actions temporarily solve budget-balancing challenges, they add to the bills someone eventually has to pay. Yet few states include information about these long-term spending obligations in the budgets that governors propose and state legislatures debate. This precludes accurate, informed consideration of policy trade-offs.

A primary aim of this preliminary study is to lay the groundwork for a common approach toward responsible budget practices in all 50 states. A continuing comparative analysis should provide a framework for a scorecard with respect to budgeting and financing practices. By shining a spotlight on opaque and confusing practices and by identifying more-appropriate approaches, we hope to provide incentives for officials to clarify financial issues and encourage debate on basic policy choices.

We invite and encourage governors, budget officers, and legislators to commit to work with us in developing useful approaches toward effective financial policies. Recent experience demonstrates the need. Mounting fiscal stress in Illinois, the bankruptcy of Detroit, and the impending financial crisis in Puerto Rico all indicate the relevance of the initiative that the Alliance has undertaken.

Preliminary Budget Report Card

Many Pensions, Many Standards

While the Governmental accounting Standards Board (GASB) provides recommendations for public employee pension funds' reporting, comparing liabilities between states is difficult because they are based on actuarial assumptions and calculation methods that differ from one plan to another.

The actuarial assumption that has received the most attention over the past 15 years is the investment return. Any change in this assumption has a substantial impact on the calculation of liabilities. For example, when Utah shifted to a 7.75 percent from an 8 percent assumption in 2008, its funding level dropped to 95 percent from 101 percent. If it had raised the investment rate assumption to 8.5 percent, the funding level would have risen to 113 percent.

Of the three states studied by the Volcker alliance, the Virginia retirement System assumes a 7 percent rate of return. New Jersey's public employee and teachers' systems use a 7.9 percent rate of return; and both the California Public Employees' Retirement System (CalPERS) and the California State Teachers' retirement System (CalSTRS) use 7.5 percent.

A number of independent experts have questioned whether the pensions' assumptions are higher than justified by existing circumstances and future probabilities. These and other calculations need to be considered when looking at the plan's calculations of its unfunded liabilities.

At the end of 2013, the state portion of the New Jersey pension system was 54 percent funded; the Virginia Retirement System was 65 percent funded. In California, the public employee portion of CalPERS was 75 percent funded, 24 while CalSTRS was 67 percent funded.

Cash Accounting

States should move away from strictly cash budgeting and toward the type of accounting, used in their audited comprehensive annual financial reports, that shows the true present value of future spending obligations. The use of cash-based fund accounting methods by most states and localities creates the temptation as well as the capacity to shift the costs of today's services onto coming generations by ignoring future spending for which taxpayers are already obligated.

For example, Virginia, California, and New Jersey have failed to make their recommended contribution, as determined by actuaries, for full funding of public employee pension systems. Yet the states' enacted budgets show only the amount governors and legislators chose to appropriate for each fiscal year or biennium studied. In addition, New Jersey and California, particularly, have amassed billions of dollars in obligations for public workers' retirement health care benefits.

The three states have substantial deferred long-term infrastructure maintenance needs that are not reflected in their budgets, and California and New Jersey have failed to reflect the cost of future obligations for K-12 spending required under statutes or judicial orders.

California

Once tied with Illinois for America's lowest state general obligation credit rating, California now stands out as a budget reformer. Since 2013, its general obligation bond debt has garnered multiple upgrades from Moody's, S&P, and Fitch.

California has also taken steps to improve teachers' pension funding, though this is being accomplished in part by pushing the costs from the state to local school districts. Risks remain for California. The state is still saddled with $94.5 billion in bond debt supported by tax revenue, and it has amassed another $195 billion in unfunded promises to pay pension and other retiree benefits. Its revenue remains highly dependent on capital gains taxes, which means the state is hostage to the vagaries of the stock and real estate markets. Further, California has a $64.6 billion shortfall in deferred infrastructure maintenance, according to the California Five-Year Infrastructure Plan of 2014. It remains too early to tell if the state's fiscal culture has changed permanently or if California will revert to its previous tactics in the next economic or stock market downturn.

Status of Pension and OPEB Funding

California is carrying a total of $131.1 billion in unfunded pension liabilities and $64.6 billion in unfunded retiree health benefits for state workers, teachers, and local school administrative personnel. The combined amounts equal more than 9 percent of the state's $2.1 trillion economy, a burden of about $5,100 per resident.

There is much more in the 60-page report.

I side with the independent experts in regards to pension plan assumptions.

The California pension assume 7% returns. I suggest there will be -2 to +2% percent returns over the next seven years. For further discussion, please see Seven Year Negative Returns in Stocks and Bonds; Fraudulent Promises.

Such returns would devastate California and crucify Illinois. Sadly, there have been no reforms at all in Illinois.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

Greek "Paperology"; Obama Pressures Greece; Proposal Dismissed by Creditors as "Vague Rehash"; Dismal Choices

Posted: 09 Jun 2015 11:49 AM PDT

Greece remains in the spotlight and neither side seems willing to make a substantial change. This is the way it's been for five years.

Making matters worse for Greece, President Obama Says Time for Tsipras to Make 'Tough Choices'.

Barack Obama, the US president, put Athens on notice that it needed to urgently make difficult economic reforms in the clearest sign yet Greece was becoming isolated on the international stage for its combative stance towards its bailout creditors.

Breaking from past urgings for both sides to make concessions, Mr Obama put the onus on Alexis Tsipras, the Greek prime minister, saying it was time for "tough decisions".

"What it's going to require is Greece being serious about making some important reforms, not only to satisfy creditors, but also to create a platform where the Greek economy can start growing again," Mr Obama said at a post-summit news conference. "The Greeks are going to have to follow through and make some tough political choices that are going to be good in the long term."

By publicly emphasising Greece's obligations at such a critical time in the negotiations, Mr Obama has closed off one of the last potential escape valves for Athens.

Proposal Dismissed by Creditors as "Vague Rehash"

Bloomberg reports New Greek Budget Plan Falls Short of Last Week's Pledge.

Greece pulled back on budget concessions to its creditors in new proposals Tuesday, as German Finance Minister Wolfgang Schaeuble said it would be "daft" to accept blame for Prime Minister Alexis Tsipras's predicament.

The latest plan falls short of the budget targets that Tsipras agreed on in a June 3 meeting with European Commission President Jean-Claude Juncker, a European Union official said. Greece didn't dispute those objectives in any of its subsequent meetings with creditor institutions last week, according to the official.

As a result, Greece is sliding backward in its negotiations as it enters the last weeks of its bailout deal.

"It's not possible that the borrower decides under what conditions the lender kindly gives his money," Volker Kauder, caucus leader of Chancellor Angela Merkel's bloc in parliament, said Tuesday in Berlin. "We want Greece to stay in the euro, but whether this is achievable depends entirely on Greece."

Under the latest Greek plan, Tsipras wants access to bailout funds left in the European Financial Stability Facility and for the country's banks to be allowed to buy more of the state's short-term debt, an international official said. Greece also requested funds from the European Stability Mechanism to repay about 6.7 billion euros of bonds held by the European Central Bank that come due in July and August.

The official described the revised Greek plan as a vague rehash of earlier proposals and said it is not credible.

Greek "Paperology" Continues

The Financial Times reports 'Paperology' Continues, but Mood Darkens in Greece Talks.

Greece has submitted yet another last-minute economic reform proposal to its bailout creditors — and its creditors have once again dismissed it as lacking. The process has become numbingly familiar in recent weeks — so much so that the European Commission has even given it a name: "paperology".

Athens, they believe, is intentionally prolonging the negotiations to the last minute in a belief that its creditors will eventually "blink" and agree to grant wholesale debt relief and new bailout cash with few strings attached.

"They do not want a deal with us; they just want debt relief," a senior official with one of Athens' bailout monitors said after reviewing Greece's latest offer.

"I don't think they will move. I think they're waiting for us to blink, and we won't," the official added. "They don't understand we're not back in 2012 where the Europeans were willing to just throw money at the problem."

Two Dismal Plans

Wolfgang Münchau discusses Two Dismal Economic Plans for Greece.

There are now two proposals on the table — one from the creditors and one from Greece. What they have in common is that neither of them will fix the Greek economy. They do not even pretend. Both deserve to be rejected flat-out.

In particular, they [creditors] refuse to recognise officially that their loans to Greece will never be repaid. They know they misled their electorates about Greece, and do not want to be exposed, at least not while they are in office.

The main goal for Alexis Tsipras, Greek prime minister, meanwhile, is to stay in power. An agreement of the extend-and-pretend variety, which is the likely outcome of these negotiations if they end in success, may suit him. And thus the probability of a lousy deal that suits the negotiators but that will not help the Greek economy is high.

Step back a little and the solution is not hard to see: less austerity, more public sector reforms, and some clever debt restructuring. That was the overwhelming conclusion of a recent conference by some of the world's leading experts on this issue, as reported by Richard Portes and co-authors from the London Business School in a recent article.

We are not talking about reforms of the ideological variety, on hiring and firing for example, or on ending collective bargaining, but socially useful reforms such as credible tax collection, a modern public administration or a working legal system.

Without a modernisation of Greek public-sector infrastructure, there is no way that Greece and large parts of northern Europe can coexist in a monetary union. It would be a recipe for a never-ending, structural slump.

How about the argument that Greece should accept a bad deal now, as it would buy time for a more comprehensive negotiation during the summer? The trouble with that argument is a false premise. Once Greece accepts the current deal, it will have accepted the basis of the next agreement as well because the fiscal calculations will not change. If you accept austerity now, you have accepted it.

The best negotiating tactic for Mr Tsipras would be to reject the creditors' offer flat-out, and come back with an intelligent plan, one that has a chance to work. It would have to include more reforms than he is offering right now. He would need to go beyond his famous red lines — on pensions or on value added tax, for example.

Nearly Correct

Münchau goes on to say "The worst possible outcome would be another extend-and-pretend type deal, leaving an unreformed and cash-deprived Greece in a perma-depression."

On that point I strongly agree. But higher taxes will just make matters worse. The main thing Greece needs is pension and work rule reform.

The best possible outcome would be for Greece to tell the Troika to go to hell, default, initiate reforms and grow out of the problem.

Unfortunately, Tsipras does not want those reforms, while the creditors want higher taxes. Hiking taxes in the middle of an economic depression is madness.

The only reason it has not come to Grexit already is insistence from Chancellor Merkel that Greece stay in the eurozone.

Haircuts Coming

One way or another, haircuts are coming. Either the creditors agree to them or Greece defaults. The game now for both sides has nothing to do with what's best for Greece. Instead, both sides simply want to point the finger at the other when this mess flies apart.

Had the ECB been smart, it would have ended Emergency Liquidity Assistance (ELA) long ago. But that would have given Greece the upper hand in finger-pointing. Instead, time buying "paperology" allows Greek citizens to quietly pull money from Greek banks.

German taxpayers will pay one way or another. The smart move would have been to discuss another haircut while demanding genuine reforms instead of tax hikes. But neither side could sell such a plan to its constituency.

Dishonesty by both sides is rampant.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot

At Least Two More Illinois Cities Poised for Bankruptcy

Posted: 09 Jun 2015 12:38 AM PDT

On May 29, citing a report mentioned in Bond Buyer, I noted Five Chicago Suburbs Headed for Bankruptcy (More Illinois Cities Will Follow).

The cities are Maywood, Sauk Village, Blue Island, Country Clubs Hills, and Dolton. The village of Dolton strongly disagrees with the report. The others did not comment.

The Bond Buyer report was based on an analysis of state comptroller's local government Finance Warehouse by Marc Joffe at CivicPartner, a municipal finance research firm.

I have since been in contact with Joffe and asked for an opinion of several cities I believe to be seriously troubled. My top two choices were Harvey and Robbins.

Harvey and Robbins

Joffe responded ...

Hello Mish

Your intuition was correct about both. Harvey and Robbins are at least as bad as the five I listed in the original report.

Harvey

The last publicly available audited Financial Report for the City of Harvey covers the year ended April 30, 2009. In that year, the City reported an unrestricted net position of -$17.6 million and a general fund balance of -$10.4 million. The negative fund balance was equivalent to over half the city's annual revenue.

The city has provided incomplete, unaudited reports for subsequent years. The latest available report, for the year ended April 30, 2013, shows a further deterioration in the general fund balance to -$19.3 million – about 85% of annual revenues. According to the Chicago Tribune (See Harvey Residents Detail Life in 'Lawless' Suburb), the city's 2014 budget also included a deficit, suggesting that Harvey's fiscal imbalance is even worse today.

Harvey's late reporting and accumulated general fund deficit led Fitch to downgrade the city from BBB- to B in February 2010 and then to withdraw its ratings entirely in November of that year. The city has now been unrated for more than four years.

Harvey issued general obligation bonds in July 2007. The tax exempt bond maturing in 2032 yielded 5.22% at issuance. In May, this bond traded in the 70s and yielded over 8%. More recently, the city issued bonds to finance the development of a hotel and conference center, but the SEC found that some of the proceeds were being siphoned off by City Controller Joseph Letke. In January 2015, a court ordered Letke to pay over $200,000 and barred him from participating in future municipal bond offerings.

Robbins

According to its 2014 Audited Financial Statements, the Village of Robbins had a net unrestricted position of -$7.0 million and a general fund balance of -$8.9 million, or more than three times annual revenue. The village's audit provided a qualified opinion, noting that "records supporting balances for capital assets, depreciation expense and accumulated depreciation were inadequate. As a result, we are unable to audit reported balances for capital assets, depreciation expense and accumulated depreciation. In addition, management was unable to provide adequate records to properly record compensated employee absences, which we were also unable to audit."

Regards,
Marc

Strict Standards

I gave Marc a few other cities to research, but the focus now is on the worst of the worst. The reason is that municipal bankruptcies require inability to meet current expenses as opposed to corporate bankruptcies that only require proof of insolvency.

Numerous Illinois cities are technically insolvent, but for now can pay the current bills. Pension obligations will eventually wreck many of them.

In addition to the previously mentioned cities, taxing bodies like the Chicago Board of Education are currently among the walking dead.

Illinois desperately needs to pass legislation that will allow municipalities to go bankrupt, but the law is still hung up in the legislature.

Illinois Crisis

For more on the bankruptcy and pension crisis in Illinois, please see ....

Every delay in passing much needed bankruptcy legislation hurts the cities that need to file, while exacerbating the problems for all Illinoisans in the meantime.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot

Damn Cool Pics

Angelina Jolie And Brad Pitt Pass On First Class As They Fly To Paris

Posted: 09 Jun 2015 02:34 PM PDT

Angelina Jolie and Brad Pitt are two of the most famous people on the planet but they're still very down to Earth. They recently took their six children on a trip to Paris. But instead of flying on a private jet or even first class, they decided to fly economy just like the rest of us do.