Most Popular
1. Banking Crisis is Stocks Bull Market Buying Opportunity - Nadeem_Walayat
2.The Crypto Signal for the Precious Metals Market - P_Radomski_CFA
3. One Possible Outcome to a New World Order - Raymond_Matison
4.Nvidia Blow Off Top - Flying High like the Phoenix too Close to the Sun - Nadeem_Walayat
5. Apple AAPL Stock Trend and Earnings Analysis - Nadeem_Walayat
6.AI, Stocks, and Gold Stocks – Connected After All - P_Radomski_CFA
7.Stock Market CHEAT SHEET - - Nadeem_Walayat
8.US Debt Ceiling Crisis Smoke and Mirrors Circus - Nadeem_Walayat
9.Silver Price May Explode - Avi_Gilburt
10.More US Banks Could Collapse -- A Lot More- EWI
Last 7 days
Stock Market Volatility (VIX) - 25th Mar 24
Stock Market Investor Sentiment - 25th Mar 24
The Federal Reserve Didn't Do Anything But It Had Plenty to Say - 25th Mar 24
Stock Market Breadth - 24th Mar 24
Stock Market Margin Debt Indicator - 24th Mar 24
It’s Easy to Scream Stocks Bubble! - 24th Mar 24
Stocks: What to Make of All This Insider Selling- 24th Mar 24
Money Supply Continues To Fall, Economy Worsens – Investors Don’t Care - 24th Mar 24
Get an Edge in the Crypto Market with Order Flow - 24th Mar 24
US Presidential Election Cycle and Recessions - 18th Mar 24
US Recession Already Happened in 2022! - 18th Mar 24
AI can now remember everything you say - 18th Mar 24
Bitcoin Crypto Mania 2024 - MicroStrategy MSTR Blow off Top! - 14th Mar 24
Bitcoin Gravy Train Trend Forecast 2024 - 11th Mar 24
Gold and the Long-Term Inflation Cycle - 11th Mar 24
Fed’s Next Intertest Rate Move might not align with popular consensus - 11th Mar 24
Two Reasons The Fed Manipulates Interest Rates - 11th Mar 24
US Dollar Trend 2024 - 9th Mar 2024
The Bond Trade and Interest Rates - 9th Mar 2024
Investors Don’t Believe the Gold Rally, Still Prefer General Stocks - 9th Mar 2024
Paper Gold Vs. Real Gold: It's Important to Know the Difference - 9th Mar 2024
Stocks: What This "Record Extreme" Indicator May Be Signaling - 9th Mar 2024
My 3 Favorite Trade Setups - Elliott Wave Course - 9th Mar 2024
Bitcoin Crypto Bubble Mania! - 4th Mar 2024
US Interest Rates - When WIll the Fed Pivot - 1st Mar 2024
S&P Stock Market Real Earnings Yield - 29th Feb 2024
US Unemployment is a Fake Statistic - 29th Feb 2024
U.S. financial market’s “Weimar phase” impact to your fiat and digital assets - 29th Feb 2024
What a Breakdown in Silver Mining Stocks! What an Opportunity! - 29th Feb 2024
Why AI will Soon become SA - Synthetic Intelligence - The Machine Learning Megatrend - 29th Feb 2024
Keep Calm and Carry on Buying Quantum AI Tech Stocks - 19th Feb 24

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

Chicago, the Windy City has a $26.5 Billion Pension Problem

Politics / US Debt Apr 17, 2014 - 05:27 PM GMT

By: Survive-Prosper

Politics

Rodney Johnson writes: The Windy City has a $26.5 billion problem — it is short of that amount.

That’s a lot of dough for one town.

Overseers of the city’s finances haven’t kept up with their payments to the city pension funds, while the investment gurus running the funds haven’t been able to make their projected returns.


As a result, city pensions are woefully underfunded — having just 50% of their necessary funds in place.

And as if being only half funded on the pensions of your current and future retirees wasn’t enough…

Chicago will see its mandatory contributions to the pensions soar over the next three years. In 2012, the city was required to make $692 in contributions.

By 2017, this number will shoot up to $2.4 billion.

It’s hard to see where Chicago will get that kind of cash, since businesses and citizens aren’t likely to approve any tax increases.

This negative news isn’t lost on investors and analysts. Moody’s Investor Service recently downgraded the city of Chicago from A3 to Baa1 — the lowest of any big city in the U.S., with the exception of bankrupt Detroit.

Unfortunately, there’s no help to be had from the state of Illinois, since it has its own debt problems, with state pension funds holding only 45% of the assets needed to pay their obligations.

So what’s a city — or state — to do?

Clearly, they need to find new sources of revenue, since the old sources just aren’t doing the trick. As a suggestion, they could look out West.

Colorado recently legalized the recreational use of marijuana, bringing millions of users — and their dollars — out of the shadows of the black market and into the bright lights of legal commerce.

This not only removed the possibility of criminal prosecution for the possession and use of marijuana, but it also created an industry — from growing to selling — that can employ people and provide tax revenue.

Before any legal sales took place, the Rocky Mountain State estimated tax revenue could be just over $60 million in the first year.

Now that the doors are open, the estimates have moved up a bit, to $100 million in tax revenue in 2014. That’s a pretty good jump.

Clearly, $100 million in revenue to the city of Chicago, or the state of Illinois, would not provide the means to close their budget gaps or pay their pensions, but they could think a little bigger.

Consider all those corn fields that are currently used to feed the ethanol industry. If those fields were repurposed to pot, well, the sky is the limit.

Still, the pension obligations of Chicago and Illinois are huge. Maybe the two entities could renegotiate with retirees and future retirees.

Instead of being obligated to pay them in cash, they could promise the retirees cash and/or in-kind distributions, much like hedge funds do.

Then, when the fund can’t make a full payment to a retiree, it could simply send along a baggie of marijuana with the partial payment. That way, even though the retiree couldn’t pay all of his bills, at least he could feel good for a little while.

Of course, he should probably choose to buy food over paying rent, because he’ll definitely get the munchies.

While much of this is written in jest, the underlying trends are no laughing matter.

Chicago and Illinois are some of the worst examples of pension mismanagement. Even now, Chicago’s pensions assume an 8% rate of return, which is ridiculous.

There is no way that pension liabilities, as they stand today, will get paid. Taxpayers will not allow the dramatic rise in property tax rates and sales taxes that it would take to make these entities whole.

Postponing the fight for another day might be politically expedient, but it does nothing to resolve the issue.

Given that fights over money typically end up in a finger-pointing session, where bondholders are blamed, this is another factor investors need to watch out for when buying municipal bonds.

Check the pension funding of the issuer to make sure that in the next several years people are not pointing at you.

Rodney

P.S. Don’t forget Harry’s live twitter event tomorrow afternoon, from 4 p.m. to 4:45 p.m. You can follow ;@harrydentjr and if you have any questions about his latest book, The Demographic Cliff, use #democliff.

http://survive-prosper.com

© 2014 Copyright Surive Prosper - All Rights Reserved
Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


© 2005-2022 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in