Waking Up From Fiscal Nightmare That’s Chicago: Muni Week

To show how badly public pensions have been short-changed, Securities and Exchange Commissioner Daniel Gallagher mentioned a place where every household owes $88,000 for promises the government made to retirees.

He didn’t name the locality in his speech last month to municipal-bond regulators, though he did flag it in a footnote to the written text. “In case you were wondering,” Gallagher wrote, “this fiscal nightmare is Chicago.”

The home of the blues, bootlegger Al Capone and a Cubs baseball team that’s gone more than a century without a World Series win has also turned itself into a case study of municipal fiscal plight.

Today, Chicago Mayor Rahm Emanuel is awaiting a decision on a bill that would chip away at pension debts.

It’s the deadline for Illinois Governor Pat Quinn to sign legislation that would cut worker benefits and force them to pay more into retirement funds. Quinn has signaled concern about it because part of Emanuel’s approach involves raising real-estate taxes.

The measure won’t end Chicago’s crisis, with its four retirement plans $20 billion short of what they will eventually need to pay workers’ benefits. Yet it would mark a step toward fixing deficits that led to a triple-downgrade in the city’s credit grade by Moody’s Investors Service in March.

A veto by Quinn would leave the city at a loss. There’s been no discussion of a fallback plan.

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New York Mayor Bill de Blasio campaigned on raising taxes on the wealthy. That idea died in Albany. The budget for the most populous U.S. city gives him more sway over the rest of his agenda. It increases spending for schools, social services and affordable housing; it also adds to future deficits.

Whether that also worries Wall Street will be tested this week. New York is planning to sell $850 million of general-obligation bonds to refinance higher-cost debt, the largest such sale since de Blasio took office in January.

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The Los Angeles Unified School District is selling $1.7 billion of bonds, the week’s biggest sale, also to refinance debt. Houston’s utility system is offering $530 million of bonds. Probably won’t help with the humidity. South Carolina’s public-service authority is borrowing $400 million.

An uptick in sales has helped to push up interest rates. Yields on benchmark 10-year munis rose 0.08 percentage point to 2.33 percent last week, the biggest weekly jump since February.

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With the recession five years gone, states are pretty much putting its legacy behind them.

After climbing since 2010, tax revenue last year reached its previous peak, even with inflation taken into account. Somewhat flush, governors spent the early part of the year pondering election-year goodies like tax cuts. On June 12, the National Association of State Budget Officers releases its latest snapshot of all things fiscal, which may determine whether the party continues.

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In November 2010, when California voters elected Democrat Jerry Brown as governor again, they also made a threat.

The legislature had met the June 15 budget deadline only five times in 30 years. Unable to agree on what to cut or whom to tax, lawmakers left the state so broke that it took to paying bills with IOUs.

Aiming to fix that, voters approved Proposition 25, which allows a budget to be approved by a simple majority, instead of the two-thirds threshold that made for a fiesta of deadlock. If lawmakers don’t reach a deal, they can lose their paychecks. Money was withheld in 2011 when lawmakers blew their deadline.

And -- surprise -- they’ve acted on time ever since.

This year, with California buoyed by another technology boom, they’re arguing over how to divvy up the spoils instead of where to spread the pain.

Brown wants to sock some away and pay down debt. Lawmakers in his party think he’s overestimating costs associated with President Barack Obama’s health-care law and say there’s more to go around.

To contact the reporter on this story: William Selway in Washington at wselway@bloomberg.net

To contact the editors responsible for this story: Stephen Merelman at smerelman@bloomberg.net Mark Schoifet

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