The Chicago Public School (CPS) system is bankrupt in every way but the final declaration. That declaration is a foregone conclusion, and bondholders will take it on the chin.
CPS Treasurer Jennie Huang Bennett disagrees with my assessment. So does Matt Fabian, a partner at Concord, Mass.-based Municipal Market Analytics.
For her part, Bennett explained in a January online presentation that if the school district were unable to make a debt payment, “the taxes are then extended and collected for the benefit of bondholders.”
Fabian, Bennett, and others think “backdoor” tax guarantees hidden in bond offerings mean Chicago taxpayers will necessarily have to pony up if the school district defaults.
One side is wrong. Which side is that?
Let’s dive into this debate with a look at the Chicago Tribune article If CPS ever misses a debt payment, property owners would see taxes jump.
If the school district ever comes up short on its debt payments, the investors who bought CPS’ bonds can rest assured they will get what they are owed — straight from Chicago taxpayers.
The school district’s bond contracts include a little-known provision that would trigger a property tax increase if CPS fails to pay. The county clerk would deliver that additional revenue directly to a bank — much the way a creditor might garnish an individual’s wages.
“Citizens don’t know the extent to which their own assets are pledged to pay bondholders,” said Matt Fabian, a partner at Concord, Mass.-based Municipal Market Analytics.
Last month CPS struggled to scrape together enough money for a $474 million payment on its $6 billion debt load. To come up with the money, the district had to borrow about $200 million — a deal that initially stalled for lack of investors and finally got done less than two weeks before the Feb. 15 due date.
To reassure prospective investors, CPS Treasurer Jennie Huang Bennett explained in a January online presentation that if the school district were unable to make a debt payment, “the taxes are then extended and collected for the benefit of bondholders.”
Back-door referendums
Giving creditors the ability to trigger a tax hike if the alternate revenues come up short is a standard provision in the bond contracts.
“It is a method that allows taxpayers to be on the hook for bonds they did not approve in a referendum,” said Richard Ciccarone, president and CEO of Hiawatha, Iowa-based Merritt Research Services.
Battle Over an $800 Million Hole
A battle between bondholders and the school district is on deck. In a CPS presentation to investors, the CPS admitted they have a $800 million hole in the district’s preliminary budget for the 2016-17 school year.
The school district and mayor Rahm Emanuel expect governor Rauner to come up with a $458 million bailout and labor concessions as well. The odds that Rauner caves in are roughly 0%.
Teachers are threatening to strike as soon as April 1. Throw into the mix state law caps which forbid interest rates over 9.0%. The next bond offering may not fly.
For a detailed look at the last bond offering that barely flew as well as the sorry state of affairs of the system in general, please see “Bond Girl” Blasts Chicago Public School Bonds, Says “CPS Genuinely Insolvent”.
Bond Market Does Not Believe CPS Treasurer Bennett
Note that the district had to pay 8.5% in its last bond offering.
Hmmm. It seems bondholders don’t believe Bennett’s preposterous claim, and neither do I.
The fact is, bondholders can’t “force a tax increase.” The county clerk can assess the tax, but that tax can be challenged.
Since Chicago is a city of landlords, I would expect all kinds of enforceability challenges. Those challenges could drag on for months or even years.
Meanwhile the district would be in default. Yields would soar, and so would penalties and taxes to make up for it.
There is nothing automatic about payment. Bennett’s claim may very well trigger a lawsuit. It’s certainly a lie.
CPS Bankruptcy Coming Up
The one-sided Tribune article smacks of something written by the CPS and panicked boldholders, for the sole benefit of the CPS and panicked bondholders.
Would mayor Rahm Emanuel really take this all the way through the courts, knowing “victory” would mean massive tax hikes on top of the biggest tax hike in history he passed last October?
His comment at the time was “It’s Not a Piece of Art“. Indeed!
Would he really pass another hike just to pay off bondholders, with the city getting nothing out of it but more misery?
Faith in Munis About to Crash
On January 20, the “B” word hit Chicago as Governor Proposed Bankruptcy for Chicago Public School System.
Last December, in Death Watch Illinois, I pointed out “Despite Massive Stock Market Rally, Illinois Pension Liabilities Go Up, and Up, and Up“.
Some muni-bondholders, and those who depend on them, are more than a little overboard with their faith.
Tax Hikes Not the Answer
This mess cannot be fixed with tax hikes or fairy dust from Springfield. There simply is no money.
Heck, solvency of the entire state is in question as Illinois IOUs Projected to Hit $10.5 Billion, $163 Billion Total Accumulated Liabilities.
Let’s stop pretending there is another solution for CPS, because there isn’t. A CPS bankruptcy looms.
The sooner Mayor Emanuel admits that, the better for him, the better for Chicago schools, the better for Illinois, and most importantly … the better for the kids!
In all this bickering, it seems we have forgotten about the kids and the taxpayers.
For the sake of the kids, if for no one else, Mayor Emanuel should be on the phone right now with Governor Rauner and House leader Mike Madigan, begging for a bankruptcy law.
If for some reason you still think muni-bondholders cannot or will not be stiffed, please pick up your phone and dial 338-7648 (D-E-T-R-O-I-T).
Mike “Mish” Shedlock
An accounting firm’s fax machine, near where Mish lives, is what you’ll get if you call that phone number with Mish’s area code.
As for “It’s Not a Piece of Art“: no kidding, more like a piece of “sheet”.
We know from the Enron mess that control fraud is rampant…probably everywhere. The solution to the almost necessity to commit fraud that the Banking and financial monopoly enforces on us via their costly loan only paradigm is monetary Gifting via a universal dividend and a price deflationary retail discount.
Of course for those who are unconscious of the economic significance of cost accounting’s convention that “all costs must go into price” the ethically challenged theories of Rand, Von Mises, Marx etc. ….can probably continue to persist right up to the time modern weaponry destroys everyone’s productive capabilities and billions of lives…..and then the same people (if they survive) will be happy to work for those who borrow the money to re-build.
Or they could actually look at Wisdomics/Gracenomics….and begin standing on their own hind legs.
wisdomicsblog.com
Wouldn’t it be easier if you just tell us how you made so many hundreds of dollars in just a few hours working at home and then gave a link?
Over the last 8-9 years I’ll bet people like you have made a thousand smart @$$ed remarks like that to me without a single one of them even once actually looking in the area and at the data I refer to. That is a sad commentary on the self satisfied, orthodox closed mindedness of the conservative/libertarian membership on this blog. Why don’t you guys “break up your fallow intellectual ground” and at least entertain the possibility of a new thought?
@ Quincy and chdwr
Quincy there is no need to disagree with chdwr. Just ignore him and he will go away as he always does and come back with another name spouting his so-called wisdom. We all know it will not work. social credit he spouts and wisdom is get your money for nothing and everything for free is never going to happen. I could go on and on about it but chdwr get miffed and spouts how stupid we are because we do not accept his paradigm.
Old Guy’s Old Guy, austere puritanistic, cynical, “realistic”, never had a new thought, terminally orthodox and irrelevant advice, non-solution and spewing of unconscious establishment intent.
And by the way, all of the leading reformers are unconsciously coming to the same Social Credit (extended) policy solutions as Wisdomics/Gracenomics. And they’re not quite as afflicted with the mentally and emotionally terminal characteristics you and nearly everyone else here UNCONSCIOUSLY express.
chdwr many items over the years you and I have actually agreed on. Personally if the government wanted to actually help people they would do something like an income tax holiday on those that worked. That does not work for you though as you think we should get something for not even trying to work.
Therein lies our difference. Taxes in my mind do not matter to be honest as fiat currency is created from nothing and backed by force. We are required to pay taxes to keep the scam going on people. QE, lower interest rates enriches those with first access to money and nothing more. Lower home mortgages means nothing to me as you still become a debt slave for an over priced home. Prices are so distorted a 225 sq. ft. home recently sold in Portland for 300k. Quite honestly public officials, real estate, appraisers all should be brought up on charges for selling stuff like this to people. There is a sucker born every minute, but that property did not appraise for that amount. I did an estimate on the construction products and there was may at most 10k in products in the home and that was if I was asked to build it for you.
Theft of people hard earned savings is being stolen right in front of us and nothing happens. Instead people are more concerned with hired Trump protesters and his responses. How stupid can people be these days. I ride debt free and pay cash and do not have one credit card. Not because I am well off but because three decades ago I saw what credit scam was all about. Back when I was young, the interest charged to people today land the loan sharks in the slammer. Now it is legal.
I come from modest means but did without until I could afford it and paid cash. Vehicles today cost more then the home I live in. By the way never had a mortgage on it.
Old Guy,
Pardon my frustrations, your frugality and hard work are and always will be virtues, but if the system itself is cost inflationary by dint of the flawed cost accounting convention that all costs must go into price despite the fact that businesses MUST create a flow of costs that always exceeds the flow of individual incomes….then direct monetary Gifting to the individual is the only way to equilibrate the economy. Money is basically accountancy. Abstract theorists miss this basic fact.
In the businesses I have owned or worked for, pricing to customers was determined by what the market would bear. Current and projected cash flows determined if we stayed in that business. Cost accounting was never used to set the price to customers, it was irrelevant.
You’re missing the point. Of course businesses will try to price their products and services as high as they can….but if the underlying nature of the system itself is cost inflationary BECAUSE CAPITAL DEPRECIATION COSTS (AND OTHER COSTS AS WELL) MUST BE PRICED INTO THE MINIMUM TOTAL OF PRICES THEY MUST GET TO BREAK EVEN…AND THAT TOTAL IS MORE THAN THE ENTIRETY OF POSSIBLE (BUT NOT ACTUAL) INDIVIDUAL INCOMES AVAILABLE AND CREATED….TO LIQUIDATE TOTAL COSTS/PRICES.
Then you’ve got a systemic instability problem on your hands
You comment is pathetic and absurd.
Oh yeah…like how?
I found this phrase on wisdomics.com: “The elegance contained in simplicity…” Unfortunately, the lack of either simplicity or elegance in the blog posts (let alone grammar) is astounding. Keep trying though.
Everything there is off the top of my head and generally needs editing, but if you can’t hold two different concepts in your mind at the same time….you’re obviously going to be confused. I could be much simpler, but that would involve engaging other orthodoxies even more intransigent than those in economics. Economics is the “dismal science” for a good reason….its complex and subtle at the same time. Those who favor orthodoxy over truth prefer simplistic (not elegant) truths.
You could also engage what I put here instead of slyly trying to invalidate me with irrelevancies like grammar. That’s a sure sign you don’y have an actual answer to what I’m saying.
Just posted to Steve Keen’s latest youtube video:
If you recall I was talking about Trinity-Unity several years ago on your Debtwatch site. The Dialectic of course is a beautiful example of same. Nice of you to start incorporating it into your lectures. Trinity-Unities are all over the place in nature to the conscious and discerning individual. Duality is the signature of orthodoxy, (generally) obsessive contention, intransigence to opposing ideas and opinions, refusal to integrate and bad science. Trinity-Unity is the signature of holism, process/continuous change and integration/integrating. Of course the most enlightening Trinity-Unity in economics to be examined is debit and credit on the surface level of double entry bookkeeping, and cost accounting which grounds the theorist in the deeper concrete, real time 3 and 4 dimensional part of the economy. My continuously integrative formula that I call The Cosmic Code which is described as An integrated Duality within an integrative Trinity-Unity….puts it like this:
Where X is the sign for integration, the parentheses are the integrated Duality and everything within the brackets is the integrative process of Trinity-Unity:
[ (Debit X Credit) X Cost Accounting ]
Oh, and by the way, depreciation allowances taken by businesses on their capital facilities and means of production are only stays of execution of costs….NOT forgiveness of those costs that must, right along, be factored into total costs and so prices. And there is the beginning of the Social Credit insight and the most basic, enlightening and disequilibrating metric in all of economics, namely that the rate of flow of total costs always tends to exceed the rate of flow of total individual incomes simultaneously produced. If you recall I preached looking at all of the cost datums including I believe depreciation by name on your Debtwatch site at least a couple years ago. So again, even though it would have been nice for you to acknowledge your sources, it’s good you’re beginning, even if unconsciously, to awaken to what C. H. Douglas discovered almost 90 years ago.
One could analyze the orthodox and relevant interpretation of the macroeconomic impact of your ideas, but that would lead into divergent dielectric constructs of Marxist Progressive intent. Being that you approach economics from a societal intransigent approach, this would only lead to divergent conflict.
Not cute, not funny and not looking at what I say.
Only a fool would debate a fool.
It was “foolish” to question Ptolemy too before Copernicus came along.
WHO you calling “fool”? “Pity the Fool” (Mr. T, from the TV Series: A-TEAM)
why not ask one of erstwhile holders of “fully collatetized by hard assets” Super Senior Secured GM bonds how they feel about the sanctity of contracts in a high profile BK involving a powerful union ?
Yes, I almost put that example in too!
expectations for politicians to be rational is your mistake…
tax extraction mechanism creativity is the key to a successful bureaucracy, never underestimate the power of stupidity, corruption, and gluttony to make certain that nothing ever grows again in a place they frequent.
look on the bright side in a couple of years compliance for any and all taxes goes down the tubes and one way or another detroitization will become reality
http://www.lushfun.com
“One side is wrong. Which side is that?”
How about anyone who voluntarily lives in Illinois?
Unless you consider the ELEPHANT in the room, we are all wasting our time.
Oh yeah…like what?
Does the CPS really think that property owners are going to suddenly receive a hugely increased tax bill and that’s that? As Mish and others have described before, the system in Chicago is one of intentionally exaggerated property tax assessments that can be relieved by going to one of the preferred legal firms to file for an abatement. If a sudden and significant increase in property tax bills was attempted then the number of abatements filed for would explode.
And that begs the question, ‘Who operates and benefits from running the organization that files the abatements?
It’s all just sh!t/systemic excess costs rolling downhill. Meanwhile the false orthodoxy fight of Austrians and Tea Party types against the Keynesians who want to palliate rather than solve….goes on and on and on. Neither side has the willingness nor the ability to see past their mutual economic dogmas to a third integrative actual solution to our problems.
But in case you hadn’t noticed ideas like basic income guarantees and sovereign control of the money system are beginning to be pop up all over the place. Of course these reforms, unconsciously contain an aspect of the concept fully fleshed out in Wisdomics/Gracenomics, but they’re all still half baked because they do not contain the macro-economic tool of a retail discount which as explained in Wisdomics/Gracenomics would enable stable price deflation in a roaring profit making economic system.
All of the leading reforms are half baked. Only Wisdomics/Gracenomics has integrated all of these movements in its policies and gone beyond them in fact.
wisdomicsblog.com
“For the sake of the kids”, CPS should be shut down…apart from some elite “test-in” high schools for the people on the lakefront, it is completely useless if not harmful…
O come, O come, Emanuel!
And ransom captive Chicago’s public schools
That mourn in lonely exile there,
until the son of Daley appears.
Rejoice! Rejoice, Emanuel!
Shall come to you with user fees and graft.
The two biggest mistakes made by so many trying to handicap outcomes are:
(1) those in govt care about the kids (or vets, or inner cities, or Flint water drinkers, or anyone that cannot protect and insure the cushy lifestyle of career politicians). For those still blind to this truth, their eyes will be opened in June when the unelected bureaucrats in Brussels and their minions in Britain desperately try to scare the people (as they did in the Scottish sucession vote) into not exiting the EU (Brexit), and then a month later when unelected party bosses and delagates change the rules that kept Ron Paul out of the last Republican Convention to pave the way for another crony and dissing Trump supporters.
(2) the cycles of change that produce major trends cannot be changed or manipulated by anyone – not some powerful hedge fund or a cabal of globalist. Sure, they can manipulate within the trend for profit, but they cannot change the trend, which is determined by the individual passions of man that causes history to repeat. The loss of confidence in govt, which follows the corruption, fraud and hubris produced by its largess, is already afoot in Europe, and will be exposed in Japan, and eveutually in the US. The biggest bubble (govt) is set to pop, and NO ONE can stop it. The only question is how will people respond. We know bureaucrats will dig in their heels to save themselves, which they are already doing (i.e. FATCA, bail-in rules, war on cash and electronic money, austerity, militarization of local police, NSA money hunt, etc.). Will the people chose freedom or totalitarionism?
“If the school district ever comes up short on its debt payments…”
“CPS Bankruptcy Coming Up”
Since they were discovered, the laws of math have never changed.
10 pounds have never fit in a 5 pound bag. Math is an absolute.
When the school district comes up short on its debt payments…
Try them all for corruption and fraud.Give tax payers money to school shop for best school.Fire UNION teachers