Even more so than most cities, Chicago has had the best government money can buy. In this case, the money is willing to engage in a scorched-earth policy of crushing local investors and wrecking the city budget to achieve its end of taming unions and making Chicago even easier pickings for looting via infrastructure sales.
The backdrop is that the city was hit with a stunning three-ratings-notch downgrade by Moody’s last week, from AA3 to A3. As the Chicago Sun-Times stressed, that sort of drop is unheard of absent a natural catastrophe. From the article (hat tip Joe Costello):
Moody’s Investors dropped the city’s bond rating from Aa3 to A3, citing Chicago’s “very large and growing” pension liabilities, high-fixed costs, “unrelenting public safety demands” and “significant” debt load.
“You don’t usually see a triple-downgrade unless there is a catastrophic event, such as a natural disaster or terrorist attack,” said Civic Federation President Laurence Msall.
“This is a financial hurricane event for Chicago. … The city’s borrowing costs will rise dramatically and their ability to use creative financing is going to be limited because of the costs associated with having such a low rating.”
The bond rating at the Chicago Public Schools has dropped repeatedly since Emanuel took office, but Thursday’s triple-drop was the first impacting the city’s bond rating.
“The current administration has made efforts to reduce costs and achieve operational efficiencies, but the magnitude of the city’s pension obligations has precluded any meaningful financial improvements,” Moody’s wrote
Emanuel responded by essentially saying, “I told you so.”
The immediate loser are local investors, since municipal bonds are generally owned by people in the immeidate area, and the city, since it will face higher borrowing costs. So why is Rahm so smug, and why was he so keen to see a downgrade? Normally corporate CEOs and city managers tout the prospects of their charges and want them to have the most favorable borrowing costs.
But the big point of friction has been Chicago’s underfunded pensions, the rest of over ten years of the city failing to contribute enough annually. And Rahm, rather than trying to find equitable solutions, has instead been playing hardball from when he took office:
Last year, Emanuel blindsided and infuriated union leaders whose collaboration he had promised to seek to solve the pension crisis.
Instead of negotiating first with union leaders in Chicago, he went to Springfield to lower the boom. The following day, he sent a letter to city employees to soften the blow of the bitter pill he’s asking them to swallow: a 10-year freeze in cost-of-living increases for retirees; a five-year increase in the retirement age; a 5 percent increase in employee contributions and a two-tiered pension system for new and old employees.
Labor leaders accused the mayor of pitting hardworking employees against taxpayers by portraying a 150 percent increase in property taxes as the only alternative to employee concessions.
In the end, Chicago’s pension crisis was put off along with state’s $83 billion pension problem as lawmakers continued to grapple with rival plans championed by House Speaker Michael Madigan and Senate President John Cullerton, both Chicago Democrats.
With that background, here’s the next piece of the story: local CEOs have been pushing the rating agencies for downgrades. Watch this video starting at 47:00. The speaker is Ty Fahner, the head of the Civic Committee of the Commercial Club of Chicago. Members include the union-busting Pritzers, both Penny and Thomas, a long list of current and recent corporate CEOs and chairmen, influential members of the banking and real estate industries, partners from major law firms, and Rahm as an “honorary members”. This is a Who’s Who of business Chicago.
Not only was Fahner open about how aggressive the lobbying by the CEOs for the downgrade had been, and didn’t disagree with the questioner who called it irresponsible (as in “we know we are doing harm to promote what is good for us”), he said they’d had to back off because they didn’t want their handiwork to be too visible, and was exhorting people in the room to take up the campaign for him.
So here we have it: city fathers working to wreck a city budget so their companies will benefit from more tractable, as in more broke, local workers.
I asked a colleague who had worked for Moody’s in the 1990s why outside parties were allowed to influence ratings. His reply via e-mail:
When I was at Moody’s, a substantial majority of the rating downgrades or upgrades that took place were initiated by an outside investor inquiry.
These days, it’s big business for investors to research a bond, conclude that it should be upgraded or downgraded, take the appropriate position in the bond, and then lobby the rating agency to make the move that is supported by their research, and profit from the change in market value (or market to model valuation) that accompanies the rating change.
Since rating agencies have historically invested virtually nothing in surveillance, it is not hard for a diligent investor to be ahead of the rating agency action. Once the rating agency gets the info on the bond, it is very hard for the rating agency to ignore the information.
So these Illinois business leaders are just applying the same techniques that people at Third Point, Paulson, Elliot, etc. have been applying for years. (Not only that, the rating agencies use the same approach against competitors- if they hear from investors/issuers that a competing rating agency is doing something too aggressively, they call it into the SEC – which is what happened to Egan-Jones).
When I first read about the downgrade, my reaction had been that Rahm must have pushed for it. My colleague had a similar reading:
Also, I’m pretty sure I read in last couple of days that Rahm himself lobbied Moody’s to downgrade his state. I think that’s pretty fucked up, but I’m sure his hedge fund buddies taught him all about it. It’s about as evil as I would expect from Rahm as an elected politician.
Nothing has changed with the current corrupt ratings system because it serves too many powerful interests too well. Jane Hamsher, based on a detailed construction of when S&P became a big scaremonger over US deficits and downgraded the US (which was supposed to End the World as We Knew It but as we predicted, didn’t), made a persuasive case that the ratings agency took this stance to ward off regulatory action. Had the US downgrade produced the bond yield blowout that the financial media was convinced would happen, it’s a near certainty that Obama would have gotten his Grand Bargain and Social Security and Medicare would have been trimmed in a serious way. You can expect more drumbeating about the US rating as Obama makes another Grand Bargain push (the biggest upside of the Edward Snowden revelations may not be any curtailment of the surveillance state, but forcing Obama to divert so much political capital to that fight that he doesn’t have enough chips left to push through Medicare and Social Security whackage).
As our former ratings agency staffer concluded:
It is unreasonable to expect that anything would have gotten better with the rating agencies when nothing has been done to change anything. If elected officials really wanted this sort of thing to stop, they would actually, you know, do something. It is clear that they are happy with the current system, which includes a lot more lobbying activity from the big three than it did in the past.
And increasingly, one of the pet political uses is for ratings to serve, as the questioner indicated in the video, to create the illusion that “the market” is insisting on austerity, when powerful people are rigging the process.
“hardworking employees”: both of them.
Rahm, is that you?
Am I getting this right that it’s an interest rate fixing scheme, at a time when private borrowers are rejected by the risk averse lenders, who have too much cash in reserve, with no place to invest it? So they downgrade the public borrowing rate, and have their sure thing that beats the market. I like to try and think one step ahead, since I don’t have the background knowledge already. So to me, the next step is to complete the circle with rigged “stimuli” contracts. These become authorities unto themselves, forcing citizens to pay without a say. It’s like triangular trade combined with a shell game, to this layman.
You are most certainly getting it right, and the rigged stimuli are Chicago’s TIF districts:
Everything in this city is a game.
How did any even somewhat intelligent Chicago voter not see this coming when they voted that NWO, globalist scumbag Emanuel in to office. You shall reap what ye sow. It’s like the people of FL, OH and WI acting shocked, shocked I tell you, when their governors lit thier states on fire just as they said they would when they were running for office. Wake up sheeple!
Do they use hand-counted paper ballots in Chi? But really, Chicagoans will elect the Dem who is running, and the Dem party controls that, neh?
Frank Nitty wasn’t voted in, he was “installed”. Just ask Al up there in the Big House.
My thoughts exactly. Why exactly did the Unions support this low life? Why did they not run their own candidate?
The head of the Chicago Teamsters endorsed Rahm in 2011 primary while other unions either stayed neutral or opposed him.
A lovely bunch of people:
I did not vote for him. But it’s important to remember that he was coming straight from Obama’s White House to Obama’s hometown. There was at the time, and probably always will be support for Obama in Chicago, especially in minority communities (even as they complain). It was a very short election, so it really favored somebody with high name recognition, and with a lot of money. The other two candidates were both hispanic, had there been one “unity” candidate things might have been different. As for union support, I don’t remember any but if did get any official endorsements it was probably from the trade unions, who typically support the powerful, i.e. pay to play. There was a aggressive challenge to keep him off the ballot, but that failed-again he had the support of the powerful and any other candidate would have got kicked off. Again, nobody I knew voted for him but coming off of years of Daley I think there was sense as somebody new and young (by comparison) he had to be better. He certainly said the right things, and has done quite the opposite. I think even cynics were taken aback to the extremeness of the neoliberal agenda he has pursued.
“[E]ven cynics were taken aback to the extremeness of the neoliberal agenda he has pursued.” Just like Obama.
There were a number of challengers in the primary using his residency status for their ballot protest. If I remember correctly, Rahm had moved his family to DC, changed his driver’s license and everything else to reflect DC as his residence and rented out his Chicago home. When Daley announced his retirement (timed for Rahm’s easy transition), Rahm suddenly wanted to break the newly renewed lease with his tenant so he could claim the proper residency in order to run. To his credit, the tenant told him where to get off, leaving Rahm to rent an apartment. The whole ballot challenge ended up in court, where the normal IL corrupt judges found that Rahm was indeed a resident for the specified time period and could certainly run for Mayor. The rest is history, as are the scorched earth policies he insists on using. As for the voters, the majority vote how their ward bosses tell them, so no real hope to change the status quo for his re-election as many believe will happen – though I hope to be wrong about that.
You have to distinguish the union bureaucracy from the union members. The bureaucrats control the members just as the Democratic Party leadership controls Democratic Party members (who are generally far more liberal and progressive than the leaders) through rigged internal process, good-old-boy networks, and favors for loyalty. Also, unchallenged propaganda by the (organized) leaders/bureaucrats directed at the (unorganized) mass membership.
That said, the union bureaucrats will not challenge the Democrats because they have cozy personal relationships. It’s a racket. Union mis-leaders are getting paid hundreds of thousands of dollars salaries- why would they do anything to rock the boat?
Nor will the membership take any real risk (even if the long-term result is certain destruction) as long as they still have things fairly OK- do you take a huge risk of being fired to fight back against the long-term steamroller? By accepting the bribe of Privilege *within capitalism* in the ’30s-’60s, the middle-class painted itself into a corner. They rested on their laurels instead of recognizing that those privileges would only last until the capitalists recovered enough to come take them back. So today you have so-called unions, including the membership, that are only interested in maintaining that privilege. They are totally invested in “labor peace” and refuse to recognize that it was nothing but a ruse to disarm our side in the Class War. As long as they refuse to see this, myopically focused on themselves and their privilege, what hope is there in them? Does anyone expect them to risk getting fired in order to try a strategy that might actually work?
Wisconsin is an even more extreme example. Despite it being painfully obvious to activists that the government since 2011 has been rolling out a program of Shock Doctrine-style boot-stomping-face-forever neoliberalism, union members never were able to see past the ends of their own noses. They went with the Democrats again because there was no immediate danger in doing so. No illegal or potentially contract-breaking acts necessary. And then since it failed they have been completely paralyzed. Many people have gotten in their Privilege Escape Pod and fled the state like the cowardly scum they always were. The union bureaucrats have taken up the slogan (I am not making this up) “We can win with the tools we have”. The actual workers, still drowning in privilege, are a mob of fat, wide-eyed animals capable of processing immediate stimulus but with no ability to do any kind of higher cognitive functions, long-term planning, or historical analysis- particularly if the results of that kind of thinking would be, “You are going to have to be exposed to danger at some point”. Ah, if there is a motto for the middle-class, is it not, “Nothing bad can ever be allowed to happen”?
Again, though, TINA. Is News from Nowhere really the alternative, and if so, how to get there?
Organizing the Precariat class on industrial lines, recognizing that “shitty low-skill jobs” is its own industry, is probably the best place to start. And creating viable alternatives here and now that people can tangibly buy into when the ‘plausible promise’ threshold is reached.
“[V]iable alternatives here and now that people can tangibly buy into” is it. Concrete material benefits (“tangible”) count in politics. Haven’t seen them but that doesn’t mean they aren’t there. And the “shitty low-skill jobs” collectively have our fragile supply chain by the throat….
I had some kind of pie in the sky idea of labor unions until I started reading labor histories. You need solidarity across the boards in order to run a labor candidate, I would imagine. But there has never been that kind of solidarity here in the U.S. like there is in Europe. Won’t happen without major changes in how unions are organized. Right now they are more like fiefdoms than communities of workers. French unions are lean with small staffs and are paid about the same as the average worker. So with very little money they are still able to pull off a national general strike. Solidarity of purpose is powerful, but money rules here.
The United Mine Workers did pretty well at solidarity back in the 19th century. There are other examples.
I realize they are not the norm, not by a long shot.
Moody is no other than the agency that gave the most sterling rating to the mortgage garbage WS has created from worthless paper. Had we had a Democratic president and a Democratic Senate, the heads of Moody, as well as other rating crooks and CEOs of the TBTF banks, would have been in jail for decades to come.
The pension problem, not uniquely American, is nothing short of transfer of money from the rightful hands of future retirees to a variety of blood suckers from the 1%. With help from Reagan, Bush and Obama, employees’ wages have been cut and pensions have been painted as unreasonable, even outrageous, burden on the public.
Our political system is bankrupt. There is a single anti-labor front from the extreme right to almost the extreme left. (Our lovely left is way too arrogant to care about labor; they do NSA and Palestinians only.)
Hard to organize when the NSA is recording everything and (tinfoil hat time) feeding the choicest morsels to the local Fusion Center. That said, I take your point.
From an article in the Chicago Tribune a couple of months ago:
According to the Civic Federation, Chicago seems to have spent nearly a decade systematically lowballing its pension contributions. The Sun-Times article cited in this post says that they are still doing it:
‘Actuarily required’ but not ‘legally required’ — where have we heard this before? Errrmmmm … oh, yeah … Social Security. It’s about $10 trillion short of actuarial full funding. But because of a handy Supreme Court ruling fifty years ago, legally Social Security operates at the discretion of Congress (the very entity which has siphoned off its reserves). Little citizens such as ourselves have no legal recourse to challenge the chronic underfunding of this national pension scheme.
Owing to the abuse of sovereign privilege, there is an inherent conflict of interest in government-sponsored pension schemes. Thanks to worsening demographics — six of the 10 Chicago-area funds had more retirees than workers in fiscal 2011 — the astonishing scope of sovereign embezzlement is out on the table for all to see.
If public pension funds were obliged to comply with ERISA, underfunding would never have reached this level. But of course, governments have conveniently exempted themselves from the high standards imposed on the private sector in 1974. No accountability — how’s that working out for us?
I’m not saying Chicago does not have an underlying problem. But burning the bond rating to pressure the unions (and thus screwing municipal bondholders and making your general funding problems more acute) is a hell of a way to go about it.
Correct and correct.
And the Chicago municipal employee unions are as dirty as anyone in the Chicago political arena. The Chicago teachers union is as big a debacle as anything.
I concur. It’s a quite destructive way to gain political leverage.
Destroying the bond ratings is rational when it is considered within the construct of ‘The Chicago Way’.
You are correct about actuarially required, but not legallly required.
Even from an actuarial standpoint, the FASAB, the accounting advisor for the federal government, opines that social insurance payments are non-exchange transactions.
Exchange transactions are those in which people barter their goods and services. Non-exchange transactions means one party, the government, compels you to pay in, while the other party, the citizens are not obligated to be paid back. And, this is from an accounting advisor!
It’s been perhaps too long sine I read Annimal Farm. I can’t tell if Ty Fahner is a pig starting to look like a human or a human starting to look like a pig. But he’s right at that transformation point where one or the other will emerge.
In either case, no offense meant to the Pig species of annimal whose only sin is that humans have found them easy to “fatten up”.
This is the comment of the day. Superb!
Is this for real?
What good could a busted city budget possibly be to local business leaders?
[or, if you want the short version of all this: http://www.chicagoreader.com/Bleader/archives/2009/05/18/parking-meters–the-easy-version ]
I’m not sure what they’re going to lease out next–the libraries? the school system? streets and san? but I’m sure the deal’s already put together and is just waiting on a crisis to force it through.
“My Kind of Town”
Humans are almost irrational by nature. What might rationally make sense for a business over the long term doesn’t necessarily fit with the neo-religious views of the modern capitalist/neo-liberal/fascist. Cutting taxes may spur growth in the short term, but the long term effects are often ignored in favor of religious fervor.
Buying public revenue flows at 15% of their NPV, with extremely favorable lease terms, seems to make pretty good business sense to me–no neoliberal ideology required.
It’s the other side of the deal that deserves some examination.
Just to be clear, I don’t think the people on the other side of the transaction are behaving irrationally either. Sellng off public assets at a steep loss, then taking a cushy job with one of the firms that gained from the deal you pushed through–what’s irrational about that?
If corrupton is legal, rational economic actors will make use of that legality.
Daley II works for the law firm that put the parking deal together.
It was the innumerate Chicago City Council and Mayor Daley that stovepiped the Chicago Parking meter revenue stream give away debacle without professional council.
Quite frankly, I am very surprised that people don’t enmasse reject it and put the meters into an “inoperative condition”.
As I recall, the professional counsel that put together the parking meter deal (and the Skyway deal and the downtown garage deal) put Daley on their payroll within weeks of his departure from office.
I don’t really think of Emanuel’s as a new administration. It’s the same dynasty, the same m.o.
…put Daley on their payroll within weeks of his departure from office.
Yes I believe thats correct. What I meant was a counsel representing the interests of the City. I still think he should be prosecuted, might not convict him but it would be correct to try.
La cité, c’est moi.
I love that Rahm is still the gift that keeps on giving.
Cities like Chicago help us see demonstrably that the problem in this country is not the GOP or rural America or evangelical Christians or flyover country or the 2nd amendment or whatever. It is the leadership of the Democratic party that is destroying our republic, one city budget and public private partnership and charter school and union busting act at a time.
Most astute comment. It also wasn’t the Republican mayors that brutally drove out the Occupiers. Glen Ford over at The Black Agenda Report has a great essay on Detroit and Naomi Klein’s “Disaster Capitalism”. If you think it’s just about black urban dwellers or teachers, think again. http://www.blackagendareport.com/content/detroit-bell-tolls-all-us
Thanks, and good link.
Not that the GOP or rural Americans or evangelical Christians or flyover country or the (perversion of) the 2nd amendment are immaterial, elements of them are all pretty toxic, but it is really the Democratic Party that has relentlessly dismantled our country, from Clinton onward. And Rahm is the uber-Democrat.
Rahm becomes more of a Democrat the further he gets from Chicago.
It’s interesting to look at Moody’s top shareholders, and wondering which of them got a cut from the deal.
See what happens in a one party (Democrat) state.Now if Barry succeeds with his Lebensraum policy for those 11 million illegal immmigrants what effect do you think that will have on the good citizens of Chicago?
I am sure all those Democrat idealogues who will lose 90 cents on the Dollar in their pensions will look forward to competing with the recipients of Barry’s racist,anti American Lebensraum policy (otherwise known under its decontaminated title ;Comprehensive Immigration Reform)as check out clerks at Wal Mart to make up the shortfall in their decimated pensions.
This looks like the play the powers that be are using to privatize the Post Office, with Congress playing the role of Moody’s: Saddle the Post Office with pension obligations no other entity comes close to having, claim the Post Office is in financial trouble, then break it up and sell it off. The real estate alone is surely worth billions. Even if the American people still own it…
* * *
Would be better, of course, to use the Post Office bricks and mortar for a Post Office bank, and free community WiFi (and heck, why not radio?) as well. If the powers that be were interested in anything other than looting, such proposals would already have been made.
And if the postal workers were interested in anything more than merely having fair masters then they could buy them themselves and operate the USPS as a worker cooperative. But they too are stuck in the ‘peasant mentality’ of “what’s the least I have to do to not get in trouble?”.
Is it really any different than regulating scarcity in the ocean (forest) and having the fishermen (loggers) sell their fish (trees) to Japan instead of to the locals, thinking they are making a greater profit, until there are no fishermen (loggers)? Why is it that the non-profit, tax-exempt corporations control the land, at a massive discount? What happens when that land leaves the non-profit?
If all speculative profit from the stock market ends up in RE….
Who the f- is the public anyway?
So, you are setting price…local demand is 20% of supply, but you can double your money this year if you only sell 10% locally. What do you do? What is the effect of corporate behavior on personal behavior as a result? What happens to the local economy?
There is no question that Rahm Emanuel is a sleazy Neo Libral, but many big city public employee unions are just as sleazy as our worst politicians. Municipal employees of many big cities have been bleeding their taxpayers for decades, they have attained the salaries, pensions and benefits that often are well beyond the reach of highly qualified employees in the private sectors, a particularly greedy lot are the public safety employees. While evidence of this financial drain on city revenues has been obvious to all for a long time, it has not deterred the unions from from demanding salary increases from their strapped city government. This situation has come to pass because of the collusion between politicians and the clout of the public employees. The end result of this greed was always predictable.
I apologize to the many public service employees who have retired on modest pensions and benefits after years of conscience service and deserve what they have earned, but who may feel slandered by these comments. That was not my intent.
“I apologize to the many public service employees who have retired on modest pensions and benefits after years of conscience service and deserve what they have earned, but who may feel slandered by these comments. That was not my intent.”
Nevertheless, how do you justify your comments? You know where the greed lies: with the bosses (political or union), the ratings agencies, the bankers, the hedge funds and the investors. So why don’t you concentrate your accusations of greed on them????
Typical private sector lackey response of dragging people down to the lowest rung on the ladder instead of boosting each other up to the next rung. You been drinking the koolaid at the private sector watercooler? The Private sectors primary directive is Profits, Profits, Profits. It’s all about the Profits while screwing their employees at the lowest possible wage and screwing their paying customers into buying overpriced products and services. Public service jobs serve the needs of the community while circulating their taxpayer funded salaries back into the community unlike the profit driven corporations that send their profits oversees or to the Cayman Island tax havens.
I don’t know what I’d do without my trashman showing up every week unlike the corporate locus from hell who hollows out communities, towns, cities and states leaving an empty shell of desperation and destruction in search of their next victims.
City governments are strapped because they bought into the private sector nonsense of doing the job more efficiently with the cha-ching addendum of 99 year leases on public properties such as the Illinois sky way and parking meters. Tell me where all those profits are going??? I know where they’re not going; back into circulation of the community. And that is one of a multitude of private sector scams of why cities and states are strapped for funding.
Very well put.
It’s really good to know, as you get old, that the effort you put in doing hard, dangerous and boring jobs, leaves you regarded as a hopeless burden. Isn’t it time we realised the real slackers in our system are the rich? Why is their money so sacrosanct? Ours clearly is not. We have to start doing things like active not voting, burning ballot papers and raising petitions on constitutional change.
Very quickly we need temporary governments produced by
1. sortition and lot
2. public scrutiny of those governments through new technology
3. direction to close the banks while establishing utility banks and running essential services on a war footing
4. electronic parliaments based regionally
5. commitment to full employment and salary cap at 6 times basic entitlement
6. sortition to make government members representative of wide society
7. the abolition of secrecy (thought of as like the abolition of slavery) in a manner that allows the private individual
I’d see this as a temporary, adjusting phase of the republic, done because corruption has already destroyed democracy – so
8. debt jubilee
9. international service on needed projects and to expand the economy into non-planet-burning activities …
I like it!!
I like debt jubilee, especially for local gov’t to get out from under the onerous pension “obligations”. The appointed Detroit manager is showing the way!
OK, so what power do the ratings agencies actually wield?
I mean, nobody in their right mind would use ratings agency ratings as the basis for deciding whether a bond was safe or not.
So who are the people who are out of their minds who are using ratings agency ratings as a basis for pricing bonds? Is it mutual funds? Mutual funds should be outlawed.
As evidence of undue influence, on April 17, Moody’s announced new criteria for for evaluating pension liabilities under the guise of providing greater comparability across municipal credits and placed 29 communities under credit review, including Chicago.
The date of Fahner’s speech? March 6
On the other hand, the MSRB’s EMMA system, which reports trades in the muni bond market, does not show any large block (over $1 million) sales or inter-dealer trades in Chicago bonds since the date of the downgrade. If hedge funds took a position, it doesn’t look as if they have unwound them yet.
“I committed on the campaign to stabilize the city’s finances and this rating news is an affirmation that with our 2012 budget proposal we are on the right track. These ratings will ensure that we can secure the best deal for the taxpayers of Chicago,” said Mayor Rahm Emanuel.
Nothing a 1% #WallStreetSalesTax won’t solve…