On February 4, I noted Chicago on Brink of Bond Market Shutoff as tax-exempt yield hit a stunning 8.50%.
“Bond Girl“, Kristi Culpepper, an expert on capital projects and debt chimed in on Chicago’s offering last week in the biggest slam on bonds I have ever seen anyone make.
Specifically, Culpepper says “CPS Genuinely Insolvent“, but her tirade does not stop there.
Please consider some excerpts from Culpepper’s latest article Chicago Public Schools and Antisocial Behavior in the Capital Markets. The snips are in regards to the 8.5% yield on the CPS’ latest bond offering.
The sole purpose of this bond issue was to provide CPS with a few months of budget relief, not unlike the general obligation bonds Puerto Rico issued immediately before being cut off from the capital markets in 2014. And in exchange for the ability to cash flow until this June, CPS will be making payments on this new debt until 2044 at an interest cost of 8.5% — roughly triple what a top-rated borrower would be paying.
Just under $40 million of the bond proceeds will be treated as capitalized interest, meaning that CPS borrowed money to pay the investors who are buying their bonds so they can use the money that would otherwise be used to service the debt for other purposes. Approximately $208 million of the offering was a “scoop and toss” refunding. This means CPS is extending the maturities on debt that is currently coming due so the district does not have to pay that either.
So Chicago taxpayers incurred a lot of new debt that they have nothing of tangible value to show for. It’s just a simple transfer of their wealth to the capital markets, on top of the quarter of a billion dollars they recently paid their interest rate swap counterparties. This has become a routine occurrence not only for CPS, but for the City of Chicago, which shares the same tax base.
And if you think this is only a problem for Chicago taxpayers, don’t worry — the bonds were issued on a tax-exempt basis. If you are a federal taxpayer, you are subsidizing this borrowing activity.
A Complete Absence of Professional Standards
In addition to the punishing terms of the borrowing, approximately no one involved in the deal had clean hands. CPS hired not one, but two, firms for each role in the offering —six separate law firms (not counting the underwriter’s counsel) and two financial advisors participated.
The total professional fees on this single transaction topped $9 million (number taken from final official statement). Unfortunately, it is not unusual for Chicago officials to treat bond offerings as an opportunity for their cronies to loot the city. According to the Sun-Times, Mayor Rahm Emanuel paid out $74.7 million in professional fees associated with the city’s bond sales in the last year alone (excluding interest — those professional fees were financed). That is money that cannot be invested in the actual business of running the city. Jones Day collected less for handling Detroit’s bankruptcy.
One of the more scandalous developments in the marketing of the bond issue was the decision to include language suggesting that the bonds would be protected as “special revenue bonds” in bankruptcy after initial attempts to sell the bonds failed a week earlier. In my opinion, the attorneys who drafted and signed off on this language should not be allowed to practice law going forward. Yes, that is an extreme reaction. But I think it matches the offense.
Who even buys these bonds?
A lot of toxic waste lurks out there, and more than a few funds were willing to take their clients’ hard earned money and put it into the CPS Ponzi scheme.
There’s much more in Culpepper’s scathing and well-deserved attack on the Chicago Public School System as well as a defense of Governor Bruce Rauner’s proposal to let the school system go bankrupt.
As I have said numerous times previously, the school district is bankrupt. All it takes is the Illinois legislature to allow what we already know to be the case.
Mike “Mish” Shedlock
What happens when a government entity that is not allowed to be bankrupt is bankrupt? Guess we’ll find out. We live in interesting times.
The failure of the Federal government to tax something does not equate to subsidy,
“ the bonds were issued on a tax-exempt basis. If you are a federal taxpayer, you are subsidizing this borrowing activity.”
If you read through the link , the point made is that the tax exemption acts to lower interest due to investor profit calculation so making it possible for municipal borrowing to increase therefore offsetting reliance on federal spending . The difference or ‘subsidy’ could be considered the tax revenue that would have been available at a federal level for federal allocation to all citizens , being withheld at a municipal level .
If you remember mcdougal’s explanation on taxes once , to the authorities the taxed amount was never yours to start off with , and hence it follows that to not tax may be considered to subsidize !
A subsidy would be the act of giving money and not simply taking less or no money at all.
Sure, but not when it comes to government accounting. Government exists on debt, they are the obligation you vote for, and they spend before ‘earning’. To do so they claim priority in the hierarchy of claim, and that means your taxes are theirs before they even existed as your earnings.
“When a government entity that is not allowed to be bankrupt is bankrupt” it defaults on its obligations but its debts are not restructured. It decides who to pay and what to pay from its revenues and it raises taxes and fees to create opportunities to foreclose on the assets of its captured citizens.
The captured citizens have only one choice which is to get the hell out of Dodge with what they can before their property is seized.
If you must stay, you sell your assets and place the funds out of state and rent as owning anything within that entity will decline in value.
If it is a small business that you cannot sell, you shrink it and learn the ways of the black market.
Bankruptcy exists for many good reasons. Denial of bankruptcy encourages bad actions.
Bankruptcy is a mechanism to minimize the losses of the creditor and maximize the losses of the borrower, because creditors have greater political influence than borrowers. Let Illinois change its laws to allow CPS to declare bankruptcy, with 100% of the losses falling on the creditors and you would get a much healthier situation. CPS would cease being insolvent and they would not be able to borrow money.
You could change the law as you state, but in fairness it should not be applied retroactively unless you can prove there was some intent by creditors to either profit in some way from a bankruptcy or that there was knowledge the debt would be unpayable. At that level it is hard to prove anything.
The creditor/borrower relationship is always more complicated when there is a third party intermediary acting on behalf of a community. Municipal authorities are that third party, and their decisions are not individually subscribed to, and yet it is the individual who is obliged to pay the cost directly, whether he accepts the offer of municipal ‘benefaction’ or not.
The key to all of this is obligation and individual subscription to – whether it is voluntary or not.
I doubt a President Trump would rescue Chicago, Puerto Rico, nor California.
Not sure a President Trump would have much say in the matter.
That said, I’m sure a nice, generous, kind Grandma Yellen will be delighted to create all the liquidity necessary to keep Chicago in the game for as long as it takes. Along with all the other “Blue” voting precincts. Loyalty is rewarded like that 😉
Oh, and California is too big to fail. 9th largest economy in the world. 13% of US GDP. And as Blue as they come.
I don’t see any property tax revolutions going on in Illinois. Or many anti big government pols being elected. The take away is, folks in Illinois must have plenty of money with which to fund their preferred governments?
Every business that leaves Illinois is a revolution. Unfortunately the farm land cannot leave, and the poor will be with you ’till the end of the earth.
I used to own farmland in the State Where the Governors Make the License Plates but I sold out to a bigger fool and got the hell out of that Dodge!
Anybody can leave anytime and the sooner the better. Only fools would stay.
BOTTOM-LINE: The USA and each State need a Constitutional Amendment that declares:
(1) The Separation of Education and State
(2) The Separation of Charity and State
“BUT IT”S FOR THE KIDS”
This specious argument is used to defend every form of wasteful public spending even vaguely associated with education. Free breakfasts, lunches, day care, summer enrichment programs – you name it, the education industry can justify it. And objective, standardized testing is anathema because it shows the emperor has no clothes, the kids aren’t really learning and it’s just plain mean spirited to point that out!
Soaring local taxes absolutely crush property values and based on my observations, high spending per student is almost inversely correlated with academic achievement, all the feel good activities are expensive masks to conceal the absence of real learning. The kids can’t read, write, add or subtract but they have “folios” that prove they are exceptional.
End of sermon…
Beats me why parents allow government to invest in their children. Think about it – some stranger walks up and starts paying for things for them etc.. Parents should be as suspicious as hell, but I guess everything is for sale nowadays.
Those bonds might be a good investment
Imagine CPS can kick the can for five years => 42.5% of capital recovered.
Then there is a 50% chance that debt becomes guranteed by a bigger entity (such as “purchased by the fed” in which case you earn the full bond for 40Y) or 50% pf restructured for 30% of value (in which cas you only lost 30% of capital)
A case can be made for a hedge fund with some political connections (cough … Elliott … cough) to invest in those.
It’s the same kind of investment as Martin Skreli squeezing the sorts in a bankrupt biotech company : a case can be made for it as a harball yet profitable investment strategy.
I think that you are right to point out the huge underwriting fees, as they are a fractal replication of the initial problem : too much of Chicago public money goes to fees (pensions, interest on debts) for any dafault-less recovery. The end result is that one o the biggest industrial centers of the 20th century will be wiped out from the surface of earth, far more slowly than Aleepo, but unlike Aleppo or Dresden, cities destroyed by financial carpet bombing don’t recover.
Just met a family yesterday who relocated to Florida from Chicago. They were a young family with small children. They felt the need to find employment elsewhere and flee Chicago and Illinois because of the toxic conditions. Bad schools, bad roads, high taxes.
Idiotic Chicagoans are simply now getting what they voted for. Why the whinging?
The entire city government of Chicago, including the CPS, is nothing but a criminal enterprise. Those of us who have practiced law in Chicago have known this for several decades.
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