Chicago, The Puerto Rico Of The Plains, Goes The “Bowie Bond” Route (Selling Off Rights To Receive Sales-tax Revenue)

Chicago is truly “the Puerto Rico of The Plains.” Deep, deep in debt (declining population, rising expenditures).


In a frantic move to raise their bond rating, Chicago is doing what the late David Bowie did back in 1997: he securitized current and future royalties from recordings (Bowie Bonds had an interest rate of 7.9% and a life of 10 years. The Bowie bonds were purchased by Prudential Insurance for $55 million). So now Chicago is sellling off their sales-tax revenues.

(Bloomberg) -By Martin Z. Braun- Chicago’s public pension debt is $36 billion and growing, it’s facing $550 million in budget deficits over the next three years and this summer the state had to bail out a school system that was flirting with insolvency.

Yet next month, the nation’s third-largest city — whose bonds were downgraded to junk by Moody’s Investors Service two years ago — will start selling as much as $3 billion of debt that another rating company considers as safe as U.S. Treasuries.

That’s because Chicago is selling off its right to receive sales-tax revenue from Illinois to a separate public corporation, which will issue new bonds backed by those funds, a structure called securitization. Because bondholders will be insulated from the city’s finances and have a legal claim to the sales-tax money, Fitch Ratings deems the bonds AAA.

But Chicago’s sale comes as many cities face pressure from deeply underfunded pensions and opting for bankruptcy has lost some of its taint after a handful of governments did so after last decade’s recession, though Illinois municipalities aren’t allowed to take that step.
Chicago was extended the power to securitize its sales-tax payment by Illinois lawmakers this year. Paying off higher cost debt by issuing the new bonds will save Chicago almost $100 million in 2018.

Chicago’s new bondholders will have a first claim to more than 90 percent of the approximately $715 million of sales-tax revenue collected each year, according to a presentation to Chicago’s aldermen. The state, which collects sales taxes, will send the revenue directly to the bond trustee. Any excess revenue will go to the city. 

NEW YORK–(BUSINESS WIRE)–Kroll Bond Rating Agency (KBRA) has assigned an AAA long-term rating to Chicago’s Sales Tax Securitization Corporation’s Sales Tax Securitization Bonds Series 2017 A and Taxable Series 2017B.

Here is S&P’s summary.

Yes, there is a whole lot of municipal taxation in Chicago.


Chicago is now the David Bowie of cities, in addition to being The Puerto Rico of The Plains.



US Treasury 10Y-2Y Slope Drops To Near 10 Year Lows (Ahead Of Fed FOMC Meeting)

It is doubtful that we will learn much from today’s Open Market Committee (FOMC). Hopefully we will get additional clarity on the Fed Balance Sheet unwind schedule (it was supposed to start in October and it is now November).

Ahead of the meeting, both the 10Y-2Y and 30Y-5Y Treasury slopes fell to near 10 year lows.

And the 10 year Treasury Note volatility index, TYVIX, remains near historical lows.

And just a reminder, core PCE prices YoY (“inflation”) is at 1.33%, well below the 2% Fed target rate for inflation.

Well, apparently Janet Yellen and The FOMC aren’t following the Taylor Rule (or ANY  rule that I can detect).

I am sure that Janet Yellen would like to lock up John Taylor (in gold) and throw away the key.

Spending Bubble? Federal Government Spends 3x Tax Receipts

While some are preoccupied (like me) with how the next Federal Reserve Chair is going return to monetary normality (and unwinded the $4.4 trillion balance sheet), others (like me) worry about the unsustainability of US Federal spending. Particulalry how much politicians have promised Americans in terms of entitlements.

Here is a chart showing Government total expenditures (red line) along with their source of taxes (personal in green and corporate in purple). The total Federal current tax receipts is in blue. As of Q2 2017, total expenditures exceed current tax receipts (personal and corporate) by 3 times (or 3x).

With M2 Money Velocity at a historic low, printing more money isn’t doing the trick.

And with unfunded liabilities (GAAP) at $108.7 TRILLION (around $900,000 per taxpayer), the Federal government has a spending problem.

Yes, mandatory (entitlements such as Social Security, Medicare and Medicaid) going hyperbolic, discretionary spending is being crowded out and is predicted to decline.

When we included the grossly underfunded public pensions, the big scarcity in the near future is where governments are going to come up with all the money thay have promised.

Yes, Congress is “over the line.” And has been for some time.

If Jeffrey Lebowski running Congress??

S&P 500 And Margin Accounts Near All-time High (Will Fed Rock the Boat??)

The S&P 500 stock market index is near an all-time high. But then again, margin accounts at NYSE firms are also at all-time highs.


Meanwhile, brokerage call money loan rates on margin accounts continue near the all-time low (despite recent increases in The Fed Fund Target rate).


Will The Fed’s proposed 25 basis point increase at the December FOMC meeting (which would result in the call money rate rising to 3.25%) result in a slowdown of margin borrowing? Probably not.

Party on Stan, Party on Janet! 



Muni Madness: Chicago Leads The Nation In Pension Underfunding, Honolulu Requires 76,121% In Worker Contributions Over 30 Years

According to Michael Cembalest at JPMorgan Chase, Chicago leads the nation in underfunded pensions at 23%. Chicago is followed by Phoenix, Dallas and Jersey City although Phoenix’s funding gap is 52% illustrating just how badly Chicago is underfunded.


On a county level, Cook IL (home of Sweet Home Chicago) leads the nation in pension underfunding, followed by Bergen NJ (home of the former Palisades Park amusement park).

So, what will it take to fix these underfunded pensions where politicians given away other people’s money? 1) Raises property and income taxes, 2) cut pension promises, 3) both. This is called REMEDIATION.

For Chicago, this requires a tax increase of 27% OR cuts in direct non-pension spending (crowding out) OR an increase in worker contributions of 428%. My personal favorite is Honolulu which may require an increase in worker contributions of 76,121%.


Raising property taxes will have a negative impact on attractiveness of these areas since many are already seeing a decline in population and economic activity.


Puerto Rico exemplies the muni madness BEFORE the hurricane strikes. Corruption, wasteful spending, ultra-generous pension plans.

Ah, the good old days.



Juggernaut: Equity Volatility (VIX) 2nd Lowest Since 1990 As Stock Market Soars To All-time High (What Can Go Wrong?)

As of this morning, the VIX (Chicago Board Options Exchange SPX Volatility Index) was at 9.34, the second lowest level since 1990. Only December 22, 1993 is lower.


And since The Fed’s overzealous entrance into capital markets, the overnight VIX was the lowest while the S&P 500 is at an all-time high.


The VIX has rebounded slightly from overnight lows.


Super low volatility as the S&P 500 surges to another all-time high?

As Ken Hotate, the tribal elder of the Wamapoke Native American tribe in Parks and Recreation, said “An Indian tribe striking a deal with the government. What can go wrong?”

The same holds true for the stock market, The Federal Reserve and historic low volatility. “What can go wrong?”



Price tag for Kentucky’s ailing pensions could hit $5.4 billion over next two years ($3,200 For Each Household)

Kentucky’s General Assembly will need to find an estimated $5.4 billion to fund the pension systems for state workers and school teachers in the next two-year state budget, officials told the Public Pension Oversight Board on Monday.

That amount would be a hefty funding increase and a painful squeeze for a state General Fund that — at about $20 billion over two years — also is expected to pay for education, prisons, social services and other state programs.


Kentucky ugh

$5.4 billion is roughly $3,200 for each household in the state of Kentucky and 25% of the state’s entire budget over a two-year period.

Unfortunately. politicians promising retirement benefits are not a rare breed..