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).

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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.

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

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Senate’s No Salt Diet, Million Dollar Cap on Mortgage Interest Deductions (MIDs)

Yes, the US Senate has released details of their NON-tax reform bill. That is, just a simple massage.

Instead of the 3 (or 4) tax brackets from the House Tax Massage bill, the Senate will advocate tax brackets  of 7%, 12%, 22.5%, 25%, 32.5%, 35%, and 38.5%. The 38.5% rate   starts at $500k for individuals.

The Senate Finance Committee’s tax overhaul plan will keep an interest deduction for existing mortgages up to $1 million, twice that amount  mention by the initial Trump/GOP of $500,000.

The Senate tax massage will eliminate SALT (State and Local Tax) deductions from Federal tax computation.

The Senate tax massage will keep the $7,500 tax credit for electric vehicle purchases so craved by Telsa and General Motors.

House Ways and Means Chairman Kevin Brady suggests a cap on the property tax break at $10,000.

Finally, the Senate tax massage would delay cutting the corporate tax rate from 35 percent to 20 percent until 2019.

That is all I know as of now. NO TAX REFORM, just a gentle massage.

Hey Congress! How about a FLAT tax? 

The Senate Massage!

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Treasury’s Surprise Debt-Maturity Move Eases Sting of Fed Unwind (Treasury Will No Longer Seek Extending Debt Maturity)

Since Congress shows little interest in fiscal responsibility, one way Treasury can deal with the staggering fiscal deficits is to extend the maturity of US debt (aka, strectching out those debt payments).

(Bloomberg) — As the rest of Washington fixated on tax reform and a new Federal Reserve chair last week, the Treasury Department unveiled a borrowing strategy lacking fanfare but having potentially big implications for the bond market and the U.S. economy.

In a step that could limit upward pressure on long-term interest rates from bigger budget deficits and a reduced Fed balance sheet, the Treasury will break from a policy in place since 2009 and stop attempting to lengthen the maturity of the government’s debt.

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“The Treasury is trying to avoid making the mistake of throwing out long-maturity debt where there isn’t sufficient demand, which could really steepen the yield curve,” said Gene Tannuzzo, a money manager at Columbia Threadneedle Investments, which oversees $484 billion. It “seems to be making an effort to avoid a yield shock.”

That’s important for the health of the economy. Yields on longer-term Treasury debt serve as benchmarks for everyone from home buyers to corporate treasurers. A “steepening is where we could get into problems with the housing market,” Tannuzzo said.

It’s probably also welcome at the Fed, which has begun to slowly reduce its balance sheet by not rolling over some of the maturing Treasury and mortgage-backed securities in its portfolio. Fed policy makers have gone out of their way to make the unwind as painless as possible for the bond market — and the Treasury’s new approach will help in that regard.

The shift comes as a surprise. It wasn’t that long ago that Treasury Secretary Steven Mnuchin was talking about issuing an ultra-long bond with a maturity of more than 30 years. While Mnuchin signaled he was backing away from that idea in a Bloomberg interview late last month, Treasury officials went further in the department’s quarterly refunding announcement last week.

“We’re looking at kind of a stabilization from here” in the weighted average maturity (WAM) of Treasury debt, acting Assistant Secretary for Financial Markets Monique Rollins said at a press briefing in Washington on Nov. 1.

Rising Maturities
The average maturity of the $14 trillion-plus in marketable Treasury debt outstanding was at a near multi-decade high of more than 70 months on Sept. 30. That’s up from 49 months in December 2008 and is above the 60-month historical average dating back to 1980. It’s still, though, about a year less than the average of the Group of Seven industrial nations, according to data compiled by the International Monetary Fund.

The Treasury maintained its longer-term debt sales at $62 billion this quarter for the seventh straight time, opting to meet any increased financing needs from run-offs by the Fed through the sale of bills. The yield curve flattened in response as the attraction of holding longer-term Treasuries grew.

The department’s decision means that “at least initially, the Treasury is completely offsetting the impact of the Fed unwind” on long-term interest rates, said Seth Carpenter, chief U.S. economist at UBS Securities LLC in New York and a former Fed and Treasury wonk. 

The central bank began reducing its holdings of Treasury and mortgage-backed securities in October, initially limiting the monthly draw-down to $6 billion of the former and $4 billion of the latter. The caps will be gradually increased to an eventual $30 billion for Treasuries and $20 billion for housing debt. [In fact, the unwind is so slow that you can barely see it compared to the $4.456 trillion left to unwind].

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The alteration in the Treasury’s approach doesn’t mean the bond market will be spared from having to digest extra supply as the Fed unwind continues and budget deficits increase on the back of potential tax cuts.

Indeed, Treasury officials last week flagged the likelihood of stepped-up sales in future refundings. The department will “look at raising auction sizes,” Rollins said.

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With The Federal government on a path of uncontrolled acceleration in spending,

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Particularly with M2 growth outpacing real GDP growth YoY.

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But at least the US Treasury 10Y-2Y keeps declining putting less pressure of debt refunding (and helping the housing market with lower 10 year Treasury yields).

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But with skyrocketing Federal spending and widening budget deficits, “We’re gonna need a bigger boat.”

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Fiscal Inferno! US Fiscal Gap ($200T) 10X Official Federal Debt ($20T)

The USA is in a “fiscal inferno”  where the fiscal gap is 10 times higher than the acknowledged public debt of over $20 trillion.

The fiscal gap is the present value difference between all projected future government spending obligations (including official debt service) and all projected future tax revenues. The “all” is key. The fiscal gap puts everything on the books. Since the fiscal gap is $200 trillion and the official debt is $20 trillion, Congress has kept $180 trillion of net liabilities off the books.

Unfortunately, America’s $200 trillion fiscal gap, which, scaled by GDP, is the largest of any developed country.  Closing it requires either an immediate and permanent 50 percent hike in all federal taxes or an immediate and permanent 33 percent cut in all federal spending. The longer we wait, the larger the required adjustment.

Economist Lawrence Kotlikoff measured the fiscal gap showing that the US has the world’s largest gap.

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And the longer we wait to correct the problem, the worse the problem becomes.

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Actually, President George HW Bush implemented fiscal gap accounting, but that was negated by President William J Clinton leaving the US in a fantasy land of fiscal denial.

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Disco inferno!

 

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??

Moody’s: Hartford Default Likely on Yearly Deficits Seen to 2036 (Connecticut Already Has 2nd Worst Public Pension Underfunding Requiring $22,745 Person To Fix)

As we watch the alleged Federal government shutdown by politicians who crave spending more and more of YOUR money (without cutting spending), we see the same in various states and cities like Chicago, Illinois. Now Hartford CT is in on the overspending act.

(Bloomberg) — Moody’s says the city of Hartford is likely to default on its debt as early as November without additional concessions from Connecticut.

Moody’s sees Hartford’s operating deficits of $60 million to $80 million through 2036
Hartford will look to bondholders to restructure roughly $604 million in general obligation and lease debt, Moody’s says.

Moody’s sees additional grant revenue or amount equal to PILOT payments cutting view of operating deficits by over half.

Yes, one of Hartford’s municipal bonds has dropped in price to $68.75 and a yield of 12.14%.

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Moody’s says the city of Hartford is likely to default on its debt as early as November without additional concessions from Connecticut. From the second worst state in the nation in terms of public pensin underfunding (after my home state of New Jersey)? 

In New Jersey, the (public pension) funding gap represents nearly 42 percent of the Garden State’s Gross State Product – or more than $27,000 for every resident, according to S&P Global Ratings.

Other underfunded states include Connecticut ($22,700 per person), Hawaii ($15,700), Illinois ($15,900) and Alaska ($18,200).

2017.10.18 - Pension

Good luck with that Hartford. Citizens of Hartford will likely have to switch their beer consumption from Heineken to Pabst Blue Ribbon.

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Trump’s Tax Proposal And Housing: Did The Middle Class Just Get Jammed? (Largest Plunge in Renter Occupied Housing YoY Since 2003)

The Trump/Republican tax proposal sketch is out. 360061522-Republican-Tax-Plan

While the hope is that lowering marginal tax rates will stimulate the economy (creating more jobs and tax revenue for Uncle Sam), the impact on housing and the mortgage market is ambiguous at best.

Let’s run through the numbers, that we know about.

Currently, the standard deduction for an individual is $6,350 and $12,700 for a couple. So, the first $12,700 of mortgage interest and property taxes is essentially thrown away. On top of the standard  deduction, however, a of four can also claim personal exemptions of $4,050 per person for a total of $16,200. That puts that break point at $28,700 for a family of four. Below that point, the family of four would prefer to rent since they would literally be throwing away their mortgage interest and property tax deductions (assuming that the mortgage interest deduction is $8,000 and the property tax deduction is $4,000 for illustrative purposes). So, $12,000 in mortgage interest and property tax deductions is below the standard deduction for a couple for $12,700.

Under the proposed tax reform plan, the standard deduction would be raised to $12,000 for individuals and $24,000 for a couple. At the same time personal exemptions and property tax deductions would be eliminated. This will lead to more households renting rather than owning, holding all else constant.

But President Trump’s tax reform framework calls for collapsing the current seven tax brackets into three, with marginal tax rates of 12 percent, 25 percent and 35 percent. A decline in the marginal tax bracket lowers the value of the mortgage interest deduction resulting in fewer households having an incentive to buy home.

Depending on how the marginal tax brackets are finally decided, renters (generally in the lowest marginal tax bracket) could actually see a lower tax bill (say, tax savings of $500). It becomes muddled for the middle class since the loss of itemized deductions (other than mortgage interest deductions) could actually overwhelm the lowest marginal tax rate resulting in HIGHER taxes for the middle class (say, +$500-$1,000).

There are lots of moving parts on the mortgage side, including future interest rate hikes and housing finance reform. So I hope that Congress carefully weights its options in determing the slashing of deductions in exchange for low marginal tax brackets.

Remember, the US homeownership rate has fallen back to level where it began with President Clinton’s National Homeownership Strategy from 1995.

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But here is some food for thought. The inventory of renter occupied housing units as of Q2 2017 experienced the largest YoY plunge since the mid-2000s while owner-occupied inventory experienced the largest YoY gain since the mid-2000s.

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I am just hoping that the passable version of tax reform doesn’t result in a Jeremy Jamm moment for middle-class homeowners and taxpayers.

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