Month: March 2016

Submitted by 'Jeremiah Johnson', retired Green Beret, via SHTFPlan.com,

Many of the things that are happening this very moment have direct parallels in literature of the past.  Whether it is an account such as the “Gulag Archipelago” by Solzhenitsyn or a work of “fiction” such as “1984” by George Orwell is irrelevant.  Elements of the history or the storyline (regarding the former and the latter works) are now becoming thoroughly inculcated into the fabric of modern reality.

All of the measures taken by the Soviet Union to crush and control its population are beginning to manifest themselves today in the United States.  The courts are “stacked” to reflect the decision of the regime and not to rule by law.  The Military Industrial Complex contracts are still being shuffled, along with government policies that just happen to substantiate those business interests with kickbacks for all.  Laws serve political and corporate interests, and the lawmakers themselves do not represent any of their constituents: they are self-serving thieves, selling out their country and its populace for money and power.

The police departments have (for all intents and purposes) been “federalized,” with budgets and marching orders becoming increasingly dependent upon federal and not local or state policies.  Sheriffs who follow their appointed roles as duly-elected law enforcement officials upholding Constitutional guidelines are being “phased out” of existence.  The changed demographics of “forced” insertions of illegal aliens and “refugees” into populations are rapidly negating the remainder of the two-party system to ensure that the Democratic party takes control ad infinitum.

Orwell envisioned it.  His work is labeled a work of fiction, although all of the measures Oceania pursued are either currently in place in the United States or they’re being developed.  There is mass surveillance, increasing by the day.  The “internet of things,” as coined by former General David Petraeus, is almost primed to allow “telescreens” to watch our every movement, and a camera on every corner to back them up.  Orwell hated totalitarianism, having been exposed to it in his short but accomplished lifetime, and he knew man’s propensity was to move toward the enslavement of his fellow man.

The development of new weapons by DARPA and the MIC are not toward a foreign enemy so much as the purpose of using them against the citizenry.  Drones, robots, nanotechnology, and every other “gizmo” able to be employed are all being drawn from behind the black curtain to unleash upon the citizens.  Also, the world’s situation is directly paralleling “1984” as three great spheres of influence…Europe, Asia, and North America…are being created by the powers that be.  Global governance in “thirds” is probably the NWO end state, as outlined by Orwell for a very significant reason: control with as much ethnic and cultural homogeneity as possible.

It stands to reason that an Oriental (“Eastasia,” in “1984”) empire/totalitarian state would control the Oriental nations, rather than split it up between populations that are not as closely related linguistically and culturally.  We are seeing those shifts of influence into the divisions outlined by Orwell now, as the nations jockey for position and power.  Just as in “1984,” where it stated that even two of the super-states in alignment and concerted efforts could not together topple the third, perhaps the same is with our world.

The shift is toward totalitarianism, and the populations have been (and are being) conditioned to accept, if not embrace, collectivist thought and socialism.  A good example was a film called “the Mutant Chronicles,” in which there were four great super-states that were organized not as nations but as corporations, that made war with one another over resources.  We see the blending of government and corporation today in virtually every facet of life, with the illusion of elections and the illusion of choice upheld to keep the population around the dullard state of consciousness.

What will save us from this?  Will we be able to save ourselves from it?  The more and more one watches freedoms disappearing by the day, the more one must wonder if there is a way to stem the tide.  Orwell and Solzhenitsyn…visionary and historian…gave us blueprints to follow…checklists with which to use as frameworks of reference for what is befalling us daily.  Someday it may be that the brief period of freedom enjoyed by the American people may be categorized as a “work of fiction” in a future that may not even allow anyone to read it.

via Zero Hedge http://ift.tt/1MREFz6 Tyler Durden

Authored by Ben Tanosborn,

Indications are that the federal probe investigating the possible mishandling of classified materials on Hillary Clinton’s private email server while she served as Secretary of State is winding down.  And so far, neither the FBI nor the prosecutorial staff at the Justice Department has come up with information that point to Hillary or her aides knowingly, or negligently, discussing classified secrets over her non-secure email system… contrary to the hopes and “political prayers” of every soul in the Republican Party.

Truth be said with logic and candor, Hillary faces little risk, if at all, of being prosecuted for using her private email system to conduct official business; and chances of her being found criminally liable approach the totally-unlikely.  To deny Hillary the brains to handle appropriately classified, or sensitive information that could be “classifiable,” borders on the absurd; accusations of this sort solely sprouting from the usual stinging sources of ultra-right talk radio… the likes of Russ Limbaugh, Glenn Beck et al.

via Zero Hedge http://ift.tt/1MA4KHY Tyler Durden

Despite Yellen's best efforts today to basically dismiss any and all data as irrelevant going forward in The Fed's decision-making process, we suspect all eyes (and algos) will be firmly glued to this week's payrolls' data. Will it be another record month for Obama to crow about? Will Mark Zandi do the "told you so dance" to all the trump supporters who seem less exuberant about the recovery? One look at this chart  – and the disastrous trend – and we suspect, sooner-rather-than-later, the fecal matter will be striking the rotating object in America…

As Bloomberg notes, a growing gap is developing between corporate profits and job growth in the U.S.

Company earnings, a key driver of business spending and employment, tumbled in the fourth quarter and history shows that when they retreat, the economy often follows.

So we wonder just what kind of seasonal-adjustments are being used to ensure this gap remains. Notice the "gap" in 1999… that did not end well.

BofAML's Michael Contopoulos adds that it is no surprise that falling corporate earnings is a leading indicator for economic recessions – when corporates struggle to grow their bottom lines, they are forced to source liquidity through either the capital markets or cost cutting methods. And when funding either becomes unavailable or too expensive, companies must scale back through capex and/or personnel reductions.

Although a US recession is not a necessary precondition for a turn in the credit cycle, but matters only so much as its influence on the shape of the next wave of defaults, we still look closely at how macroeconomic factors could affect corporate health. And it becomes concerning to us that after a 2nd consecutive decline in year over year corporate earnings, coupled with a lack of worker productivity and higher wages, that soon the very rosy jobs numbers may begin to disappoint.

With personal spending increasing by a paltry 0.1% for each of the past 3 months, we believe consumer spending habits are already more conservative than they should be given low gasoline prices and currently favorable employment statistics. Should jobs numbers begin to disappoint, in our opinion consumers would be quick to pull back and save more of their income.

Even a marginally weaker spender could have a substantial impact on the most vulnerable companies, forcing these weakest links to liquidate, fire and default. The potential for this added labor slack could lead to a further pullback in consumer spending and produce stress within the next weakest links in the chain. This self-perpetuating cycle, should it continue, could create a rolling blackout as defaults migrate from one sector to the next. And while Energy and Materials are currently in the crosshairs, we could envision a number of sectors that could come into focus and prove unable to withstand the added stress of a weaker consumer.

To this end, we believe more attention should be paid to the current fundamentals of US corporates and the vulnerability of what are now considered ‘healthy’ high yield sectors to a wave of defaults that has the potential to spread into all industries. Although technicals are currently keeping the market afloat, we are not buyers of the market at current levels and believe fundamentals will ultimately force spreads wider.

via Zero Hedge http://ift.tt/1ZJIRby Tyler Durden

Submitted by Paul-Martin Foss via The Mises Institute,

If you thought negative interest rates were as bad as it could get with central banks, you might be in for a surprise. Central banks have been so spectacularly unsuccessful with their accommodative monetary policies that they are discussing pulling out all the stops to get the results they want. They fail to realize that the reason prices aren’t rising is because they really want and need to fall. Bad debts weren’t liquidated during the last financial crisis, the debtors were merely bailed out. Overpriced assets weren’t allowed to be reduced in price. Central banks pumped trillions of dollars into the economy to attempt to paper over the recession. Market forces want to drive prices down, while central banks attempt to prop them up. So what to do when central banks aren’t getting their way?

Central bankers may very well recommend price controls in an attempt to “jolt the economy out of its doldrums.” Of course, economies don’t go into doldrums and they can’t be jolted out of them. Recessions are not something endemic to the economy but are rather the result of central bank monetary intervention. Because central banks refuse to acknowledge their culpability for causing recessions, their methods for responding to recessions end up being more of the same thing that caused them in the first place: monetary easing. And now that those methods are proving ineffective, more drastic measures might be on the way. Remember that the last time all-out wage and price controls were implemented in the United States was in the early 1970s, also a time of great monetary turmoil. In fact, the price controls were instituted by President Nixon at the same time as he closed the gold window in 1971.

As Ludwig von Mises pointed out many decades ago, once you begin to institute price controls, you inevitably lead to socialism.

It must add to the first decree concerning only the price of milk a second decree fixing the prices of the factors of production necessary for the production of milk at such a low rate that the marginal producers of milk will no longer suffer losses and will therefore abstain from restricting output. But then the same story repeats itself on a remoter plane. The supply of the factors of production required for the production of milk drops, and again the government is back where it started. If it does not want to admit defeat and to abstain from any meddling with prices, it must push further and fix the prices of those factors of production which are needed for the production of the factors necessary for the production of milk. Thus the government is forced to go further and further, fixing step by step the prices of all consumers’ goods and of all factors of production — both human, i.e., labor, and material — and to order every entrepreneur and every worker to continue work at these prices and wages.

That is why no one should be surprised that the governments of Japan, Europe, and the United States might resort to price controls to try to achieve what monetary policy could not. It follows logically, after all, since central bankers are in the price-setting and price control game to begin with. The interest rates that central bankers target or set are themselves prices, prices of money being loaned overnight or of money being deposited with the central bank. The aim of targeting or setting those interest rates is to influence interest rates and prices in the broader economy. So if that limited price-fixing doesn’t work, governments will expand their efforts to fix even more prices. It may not come directly, at least at first, but rather through some sort of incentivization. Pressure may be brought to bear to raise wages, using tax policy as either a carrot or a stick. The aim and the effect, though, will be to move prices to where the government thinks they ought to be, not what the market can actually bear.

If price controls are in fact enacted, it will make it all the more obvious that economic planning on the parts of central banks and governments must be firmly opposed. It will separate the wheat from the chaff, those who actually support economic freedom from those who are willing to rationalize central planning. Anyone who claims to stand for free markets, free trade, and limited government but who attempts to defend the existence or importance of the Federal Reserve or central banking is a liar. Either you support free markets and freedom of pricing or you support central bank price-fixing and creeping socialism. There is no third way or middle road — socialism and the free market are mutually incompatible. A little bit of socialism in the form of price-fixing is like a little bit of gangrene, if left unchecked it will eventually infect and kill the whole. Now that governments and central banks may endorse further price controls as a remedy, the monetary policy facade has been torn away to reveal the reality that it is just another tool that leads to intensified central planning. Will enough people rise to the occasion to oppose further transgressions against monetary and economic freedom, or will they shrug their shoulders as our society continues to slouch toward socialism?

via Zero Hedge http://ift.tt/1pJ990R Tyler Durden

As President Obama explained in his Townhall in Cuba…

To make a broader point, so often in the past there’s been a sharp division between left and right, between capitalist and communist or socialist. And especially in the Americas, that’s been a big debate, right? Oh, you know, you’re a capitalist Yankee dog, and oh, you know, you’re some crazy communist that’s going to take away everybody’s property. And I mean, those are interesting intellectual arguments, but I think for your generation, you should be practical and just choose from what works. You don’t have to worry about whether it neatly fits into socialist theory or capitalist theory — you should just decide what works.

 

And I said this to President Castro in Cuba. I said, look, you’ve made great progress in educating young people. Every child in Cuba gets a basic education — that’s a huge improvement from where it was. Medical care — the life expectancy of Cubans is equivalent to the United States, despite it being a very poor country, because they have access to health care. That’s a huge achievement. They should be congratulated. But you drive around Havana and you say this economy is not working. It looks like it did in the 1950s. And so you have to be practical in asking yourself how can you achieve the goals of equality and inclusion, but also recognize that the market system produces a lot of wealth and goods and services and innovation. And it also gives individuals freedom because they have initiative.

 

And so you don’t have to be rigid in saying it’s either this or that, you can say — depending on the problem you’re trying to solve, depending on the social issues that you’re trying to address what works. And I think that what you’ll find is that the most successful societies, the most successful economies are ones that are rooted in a market-based system, but also recognize that a market does not work by itself. It has to have a social and moral and ethical and community basis, and there has to be inclusion. Otherwise it’s not stable.

 

And it’s up to you — whether you’re in business or in academia or the nonprofit sector, whatever you’re doing — to create new forms that are adapted to the new conditions that we live in today.

Investors.com's Michael Ramirez succinctly explains the difference…

 

And we leave it to RedState.com to rage…

When I first started listening I was appalled. Communism and capitalism are much more than “interesting intellectual arguments.” They are one facet of how a society views its people, subject versus citizen, and the role of the government, master of the people or servant of the people. Then I thought, maybe I’m being too critical. But as he finished I was truly horrified at what I’d heard.

 

First, we need to knock away the undergrowth. Let’s ignore the idea that there is a “sharp division” between left and right. That isn’t true and I’m not sure who, other than Obama, believes that. Certainly no one who lived in Latin America in the 1950s and 60s would. And no, Cuba does not have life expectancy comparable to the United States. Infants who die of birth defects and suicides do not count in Cuban statistics. And, ultimately, no one really knows what Cuban life expectancy is because it is not transparent of outside observation.

 

The real point here would be that fundamentally, Obama is a Marxist. As far as he is concerned the conflict between East and West from the end of World War II until the collapse of the Soviet empire was between competing economic arrangements. That was not the case. It was the conflict between the autonomy of the person and the autonomy of the state. No where is his argument more obviously fallacious than in Argentina which has suffered under differing varieties of Peronism, an amalgamation of socialist and capitalist impulses under the banner of Argentine superiority.

 

Doing “what works,” absent any guiding principles is dangerous. As far as Obama is concerned, letting Mexican drug cartels buy weapons in the United States is okay because his objective was creating a set of facts that justified more restrictive gun laws. One could actually argue that he was using “capitalism”, that is the sale of firearms, to achieve a “socialist” aim, disarming the American people. This is the same logic that led to the involuntary sterilization of undesirable people in the United States (three generations of imbeciles is enough, after all) and the extermination of undesirables in Nazi Germany. The only difference between the two is the grandiosity of scale and concept. Both are based on “what works.” “What works” is a subsidiary question that government should look at. The primary questions are “what is right” and “what is least intrusive upon the rights of the citizens.”

 

The scary idea that “inclusion and equality” are core govermental goals is evident in ObamaCare forcing nuns to be provided with contraceptive coverage and in the way the beliefs of religious people are not allowed to be taken outside the church.

 

Obama is profoundly un-American. Not from the standpoint that he is not an American per se, but because he has consciously rejected the very founding principles of the nation. Life, liberty, and the pursuit of happiness have been sent to the ashcan and we are left with “what works.”

via Zero Hedge http://ift.tt/22MIXUT Tyler Durden

Submitted byMike Krieger via Liberty Blitzkrieg blog,

While it might sound strange, a coronation of Hillary Clinton in the Democratic primary will mark the end of the party as we know it. There’s been a lot written about the “Sanders surge,” with much of it revolving around Hillary Clinton’s extreme personal weakness as a candidate. While this is indisputable, it’s also a convenient way for the status quo to exempt itself from fault and discount genuine grassroots anger. I’m of the view that Sanders’ support is more about people liking him than them disliking Hillary, particularly when it comes to registered Democrats. He’s not merely seen as the “least bad choice.” People really do like him.

 

The Sanders appeal is twofold. He is seen as unusually honest and consistent for someone who’s held elected office for much of his life, plus he advocates a refreshingly anti-establishment view on core issues that matter to an increasing number of Americans. These include militarism, Wall Street bailouts, a two-tiered justice system, the prohibitive cost of college education, healthcare insecurity and a “rigged economy.” While Hillary is being forced to pay lip service to these issues, everybody knows she doesn’t mean a word of it. She means it less than Obama meant it in 2008, and Obama really didn’t mean it.

 

– From the post: It’s Not Just the GOP – The Democratic Party is Also Imploding

I just finished watching a surprisingly good and honest 14 minute segment on MSNBC’s Morning Joe which covered how the Democratic National Committee has been rigging the primary in favor of Hillary Clinton. Host Joe Scarborough even went so far as to admit the media’s complicity in the process with regard to superdelegates. He notes:

“And I know the Republican party wishes they rigged the process as well as the Democratic party did right now, because they could rig it against Trump — but the Democratic party rigs their process so that these superdelegates, which by the way can move any direction they want, actually skew the process and the reporting so badly that the voters actually don’t have their say when it comes to voting.”

This is a key issue that has been driving me up a wall lately. It is journalistic malpractice for media outlets to include superdelegates in the total tally when these Democratic operatives can switch their support at any point between now and the convention. As we learned in the post Did Hillary Clinton Really Win More New Hampshire Delegates Than Sanders Despite a Landslide Loss?:

 

Q: From everything you’ve told me so far, I can’t understand why you’re calling Superdelegate votes “irrelevant.” It seems to me like they have the same voting power as a normal delegate, and this puts Sanders in a tremendous hole from the word “go.”

 

A: Here’s why it doesn’t matter: Superdelegates have never decided a Democratic nomination. It would be insane, even by the corrupt standards of the Democratic National Committee, if a small group of party elites went against the will of the people to choose the presidential nominee.

 

This has already been an incredibly tense election, and Sanders voters are already expressing their unwillingness to vote for Clinton in the general election. When you look at the astounding numbers from Iowa and New Hampshire, where more than 80 percent of young voters have chosen Sanders over Clinton, regardless of gender, it’s clear that Clinton already finds herself in a very tenuous position for the general election. It will be tough to motivate young supporters, but any hint that Bernie was screwed by the establishment will result in total abandonment.

 

Democrats win when turnout is high, and if the DNC decides to go against the will of the people and force Clinton down the electorate’s throat, they’d be committing political suicide.

 

The important thing to know here is that Superdelegates are merely pledged to a candidate. We know who they support because they’ve stated it publicly, or been asked by journalists. They are not committed, and can change at any time. If Bernie Sanders wins the popular vote, he will be the nominee. End of story.

I completely agree with this assessment, which is why the media plays the key role in rigging this thing for Hillary Clinton. For example, consider the following “political reporting” published by Bloomberg yesterday: 

Though Sanders picked up 55 delegates Saturday to Clinton’s 20, she still holds a commanding lead with 1,712 delegates of the 2,383 needed for a first-ballot nomination at the party’s national convention at Philadelphia in July. That includes 469 superdelegates—Democratic office-holders and party officials who aren’t bound by results from primaries and caucuses. Sanders has 1,004 total delegates.

The truth is she doesn’t actually “have” those superdelegates, and if Sanders wins the delegates people actually vote for, he’ll probably get the nomination. As such, the media invents a number that isn’t actually real, and definitely not set in stone, to demoralize Sanders supporters and make them think the gap is too large to overcome. It’s absolutely disgusting.

So given that Joe Scarborough alluded to this trick during his segment, you’d think the person in charge of graphics at MSNBC wouldn’t be so shameless. But you’d be wrong. This is how the station portrayed the race on several occasions during the segment:

Here’s another example:

Incredibly, the only graphic shown during the segment that even alluded to the fact that these numbers are inflated by superdelegates is the following:

While better, the above still represents a completely dishonest portrayal of the race. This is the right way to do it, from the New York Times:

If anything, superdelegates should be mentioned as a footnote only. Anything else represents a total lack of ethics, integrity and highlights why the public has nothing but derision for the American mainstream media.

The clip is still worth watching.

via Zero Hedge http://ift.tt/1PEoWTQ Tyler Durden

While we are sure this will not deter Japanese officialdom from declaring that QQE and NIRP is working and that the deflation-mindset is being beaten, the fact is that when February’s 6.2% collapse in Japanese industrial production is compared to the devastatingly poor plunge aftwer March 2011’s quake, tsusnami, and nuclear ‘event’, something has gone disastrously wrong in Japan.

Across every sub-sector, it was a total disaster…

 

Find the silver-lining in that – we dare you!

via Zero Hedge http://ift.tt/25ve5Hx Tyler Durden

Last week, Rahm Emanuel got some bad news. The Illinois Supreme Court agreed with Cook County judge Rita Novak’s ruling that the Chicago mayor’s scheme to put worker pension plans on a sustainable path was unconstitutional.

“These modifications to pension benefits unquestionably diminish the value of the retirement annuities the members of (the city workers and laborers funds) were promised when they joined the pension system,” the high court wrote in its opinion. “Accordingly, based on the plain language of the act, these annuity reducing provisions contravene the pension protection clause’s absolute prohibition against diminishment of pension benefits, and exceed the General Assembly’s authority.”

To be sure, the ruling didn’t come as a surprise. Indeed, it would have been next to impossible for the court to decide otherwise, given that the justices had effectively ruled on the exact same set of issues last May. As judge Novak put it in her opinion (delivered last summer), “the principle [that public pensions shall not be diminished or impaired] is particularly compelling where the Supreme Court’s decision is so recent, deals with such closely parallel issues and provides crystal-clear direction on the proper interpretation of the law.”

That “crystal-clear direction” makes it all but impossible for officials to implement reform measures that will help ensure the city’s pension system doesn’t go belly up in the short span of 10 years. As we noted last week, the good news for taxpayers is that they’ll be off the hook in the short-term as money earmarked to sweeten the deal for pensions that went along with the reform plan will no longer be needed. “The city faces a short-term benefit of about $89 million that’s currently in escrow that can be used to help other areas of the budget,” Civic Federation President Laurence Msall said, before warning that “it will be a very hollow victory for the beneficiaries.” That’s because over the long haul, this is a disaster. “The ruling eases some immediate demands as the overturned law had stepped up the city’s required contributions,” Bloomberg wrote on Monday afternoon. “Without the restructuring, the unfunded liabilities of the municipal and laborers funds will climb by $900 million a year, making them insolvent by 2026 and 2029.”

Right. Which means that unless city officials can come up with alternative ways to fill the holes, pensions will be more than “diminished and impaired” – they’ll disappear altogether like a Chinese short seller after a market rout.

But the inviolable nature of pension benefits means that no matter how certain insolvency is, the court will never sanction a plan that seeks to alter the “implicit contract” between public sector employees and state and local governments.

Needless to say, none of the above bodes well for the city’s credit rating.

Moody’s decided to get out ahead of things last year when, on the heels of the Illinois Supreme Court’s ruling regarding a reform bid for state pensions, the ratings agency cut Chicago to junk. On Monday, Fitch cut the city by two notches to BBB- the lowest investment grade rating. “Last week’s Illinois Supreme Court ruling striking down pension reform legislation for two of the city of Chicago’s four pension plans was among the worst of the possible outcomes for the city’s credit quality,” Fitch said. “Not only did it strike down the pension reform legislation in its entirety, but it made clear that the city bears responsibility to fund the promised pension benefits, even if the pension funds become insolvent.” And make no mistake, they will become insolvent.

Fitch’s decision affects nearly $10 billion in GO debt and nearly a half billion in sales tax revenue obligations.

For their part, Moody’s calls the ruling “a credit negative setback.”

“The ruling significantly limits the city’s ability to curb its $20 billion pension shortfall by restructuring benefits,” Moody’s said on Tuesday, before noting that it “expects Chicago to find an alternate plan to address unfunded liabilities” and any delay in doing so will “likely weaken” the city’s credit profile.

In other words, Emanuel needs to figure out a way to address the underfunded liabilities and he needs to do it fast.

The problem: there are no good options. Emanuel just raised property taxes (by a record amount no less) and the city has already borrowed $220 million this year. 

It may be about time to get on the phone with Detroit and ask for pointers on how to efficiently navigate the bankruptcy process.

*  *  *

From Fitch

Fitch Ratings has downgraded to ‘BBB-‘ from ‘BBB+’ the ratings on the following Chicago, Illinois obligations:

–$9.8 billion unlimited tax general obligation (ULTGO) bonds;

–$486 million sales tax revenue bonds.

The Rating Outlook is Negative.

SECURITY

The ULTGO bonds are payable from the city’s full faith and credit and its ad valorem tax, without limitation as to rate or amount.

The sales tax bonds have a first lien on the city’s 1.25% home rule sales and use tax and the city’s local share of state-distributed 6.25% sales and use tax. Additionally, there is a springing debt service reserve, funded over a 12-month period that would be triggered if coverage fell below 2.5x.

KEY RATING DRIVERS

PENSION RULING HEIGHTENS PRESSURE: Fitch believes last week’s Illinois Supreme Court ruling striking down pension reform legislation for two of the city of Chicago’s four pension plans was among the worst of the possible outcomes for the city’s credit quality. Not only did it strike down the pension reform legislation in its entirety, but it made clear that the city bears responsibility to fund the promised pension benefits, even if the pension funds become insolvent.

CITY STRATEGY ANTICIPATED: The city expects to present a strategy to address the increased burden resulting from the ruling in the next several weeks. Given the lack of flexibility to alter the liability, Fitch believes the plan must rely on meaningful use of revenue and expenditure controls to meet much higher annual payments.

UNDERLYING FUNDAMENTALS REMAIN SOUND: The ‘BBB-‘ rating recognizes the city’s role as an economic hub for the Midwestern region of the United States with a highly educated workforce and improving employment trends. Aside from its pension funding issues, Chicago’s financial profile has markedly improved in recent years, although full structural balance remains a challenge. The city’s independent legal authority to raise revenues remains a key credit strength.

RATING SENSITIVITIES

PATH TO PLAN SOLVENCY: The rating could stabilize at ‘BBB-‘ if the city presents a realistic plan that puts the pension funds on an affordable path toward solvency. The lack of such a plan would likely result in a downgrade as it would raise the risk that plan assets will be depleted and pension benefit payments would be made on a paygo basis, severely impairing financial flexibility.

RATING CAPS: The ULTGO rating serves as a ceiling to the sales tax rating. A change of the ULTGO rating, therefore, would result in a change to the sales tax rating.

CREDIT PROFILE

LONGER-TERM LIABILITIES A CHIEF CONCERN

The city continues to face credit challenges related to critically-underfunded pension obligations and rising associated costs. The Outlook for the city’s credit quality cannot be considered stable until such challenges are met in a sustainable fashion. Since last week’s ruling appears to eliminate the option of reducing the liability, the city will need to rely on its ability to increase revenues and control spending. Fitch will evaluate the direction of the rating and Outlook as their level of ability to do so becomes more apparent.

The weight of the city’s extremely large unfunded pension liability is compounded by the high (8.7% of market value) debt burden, which is the product of substantial borrowing by the city as well as overlapping jurisdictions. Many of these overlapping governments also maintain underfunded pensions, and Fitch remains concerned that the funding requirements for all of these long-term liabilities will pressure the resource base in the coming years.

The city maintains four single-employer defined benefit pension plans, all of which are poorly funded due to a statutory funding formula which has fallen far short of actuarial requirements. In fiscal 2014, the combined actual pension contribution amounted to just a quarter of the actuarially determined requirement. The combined unfunded liability for all four plans is reported at approximately $20 billion, yielding a very low funded ratio of 34% or an even lower estimated 32% when adjusted by Fitch to reflect a 7% rate of return assumption.

PENSION REFORM CHALLENGE DECISION

Last week’s court ruling struck down pension reform legislation covering two of the city’s four pension plans (Municipal and Laborers). The legislation included some changes to the benefit structure that reduce the liability, as well as a multi-year ramp up in contributions.

The city contended its reform would preserve and protect benefits, rather than diminishing or impairing them. The basis for this contention was that prior to the pension reform legislation, under Illinois statute the city was not legally responsible for the unfunded liability of the Municipal and Laborers’ pension funds.

The ruling struck down the benefit changes and confirmed the city’s responsibility for providing promised benefits. If the city does not implement a plan to increase funding, those funds face depletion in 10-13 years. The Municipal plan is the largest of the city’s four pension plans.

POLICE AND FIRE PLANS REQUIRE INCREASED PAYMENTS

The Police and Fire pension plans also faced increased funding requirements. The existing formula requires a contribution that would be sufficient to bring both systems to a 90% funding level by 2040. The state legislature passed a bill that would change the amortization period to 40 years and allow for a ramp up period to the 90% actuarially based funding level in 2020.

Those two changes are estimated to lessen the increase in the first year’s (2016) payment from $550 million to $330 million. The legislature has not sent the bill to the governor for his signature. Once the legislature sends the bill to the governor, if not signed, it would become law 60 days. The city has arranged to fund the full, higher contribution for 2016, using short-term borrowing proceeds to fund the difference.

PENSION CHALLENGES OVERSHADOW IMPROVED FINANCIAL PERFORMANCE

Management has made significant progress toward matching ongoing revenues with non-pension annual expenditures. Fitch will not consider the city’s financial operations to be structurally balanced in the absence of a sustainable, actuarially-based pension funding structure. Successful execution of the city’s plan toward financially sustainable practices would be considered a positive rating factor. Remaining plan elements include the elimination of scoop-and-toss refundings by 2019, the use of current funds to pay legal settlements or judgments, and growth of the ‘rainy day fund.’

The city ended the practice of appropriating reserves beginning with fiscal 2015. The $3.5 billion fiscal 2015 general fund budget was balanced with a reduced but still significant amount of one-time measures, including scoop-and-toss refunding. The city expects to end fiscal 2015 on budget, with no use of fund balance anticipated.

The $3.6 billion fiscal 2016 general fund budget closed the previously identified budget gap of $232.6 million through a variety of recurring and one-time measures and no appropriation of general fund balance. Fitch believes the budget target is achievable given the city’s recent history of budgetary adherence. Despite the progress made, the city’s budget still requires some non-recurring measures for balance, which is concerning several years into an economic recovery.

REVENUE CONTROL AND RESERVES KEY

Fitch views the city’s home rule status as a credit strength, fostering revenue independence and flexibility. The general fund derives support from utility taxes, state sales taxes, transaction taxes, and recreation taxes among others. The general fund does not rely upon property taxes for operations, as they are earmarked for pensions, library expenses and debt service.

The audited fiscal 2014 unrestricted general fund balance dropped to 3.6% from 4.6% of spending a year prior. Fitch views the approximately $626 million, equivalent to 19.4% of fiscal 2014 general fund spending, in the service concession and reserve fund as an important element of financial flexibility. A draw on reserves would signal an increasing reliance on non-recurring measures and could trigger a rating downgrade.

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By EconMatters

Strong API Report for this time of year, and Equities about to break out means short covering ahead for oil bears. Remember this is quarter end window dressing week as well! Expect some short covering in Oil ahead of the EIA Report on Wednesday.

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