THE BOYS' BRIGADE

On May 29, citing a report mentioned in Bond Buyer, I noted Five Chicago Suburbs Headed for Bankruptcy (More Illinois Cities Will Follow).

The cities are Maywood, Sauk Village, Blue Island, Country Clubs Hills, and Dolton. The village of Dolton strongly disagrees with the report. The others did not comment.

The Bond Buyer report was based on an analysis of state comptroller’s local government Finance Warehouse by Marc Joffe at CivicPartner, a municipal finance research firm.

I have since been in contact with Joffe and asked for an opinion of several cities I believe to be seriously troubled. My top two choices were Harvey and Robbins.

Harvey and Robbins

Joffe responded ...

Hello Mish

Your intuition was correct about both. Harvey and Robbins are at least as bad as the five I listed in the original report.

Harvey

The last publicly available audited Financial Report for the City of Harvey covers the year ended April 30, 2009. In that year, the City reported an unrestricted net position of -$17.6 million and a general fund balance of -$10.4 million. The negative fund balance was equivalent to over half the city’s annual revenue.

The city has provided incomplete, unaudited reports for subsequent years. The latest available report, for the year ended April 30, 2013, shows a further deterioration in the general fund balance to -$19.3 million – about 85% of annual revenues. According to the Chicago Tribune (See Harvey Residents Detail Life in 'Lawless' Suburb), the city’s 2014 budget also included a deficit, suggesting that Harvey’s fiscal imbalance is even worse today.

Harvey’s late reporting and accumulated general fund deficit led Fitch to downgrade the city from BBB- to B in February 2010 and then to withdraw its ratings entirely in November of that year. The city has now been unrated for more than four years.

Harvey issued general obligation bonds in July 2007. The tax exempt bond maturing in 2032 yielded 5.22% at issuance. In May, this bond traded in the 70s and yielded over 8%. More recently, the city issued bonds to finance the development of a hotel and conference center, but the SEC found that some of the proceeds were being siphoned off by City Controller Joseph Letke. In January 2015, a court ordered Letke to pay over $200,000 and barred him from participating in future municipal bond offerings.

Robbins

According to its 2014 Audited Financial Statements, the Village of Robbins had a net unrestricted position of -$7.0 million and a general fund balance of -$8.9 million, or more than three times annual revenue. The village’s audit provided a qualified opinion, noting that “records supporting balances for capital assets, depreciation expense and accumulated depreciation were inadequate. As a result, we are unable to audit reported balances for capital assets, depreciation expense and accumulated depreciation. In addition, management was unable to provide adequate records to properly record compensated employee absences, which we were also unable to audit.”

Regards,
Marc

Strict Standards

I gave Marc a few other cities to research, but the focus now is on the worst of the worst. The reason is that municipal bankruptcies require inability to meet current expenses as opposed to corporate bankruptcies that only require proof of insolvency.

Numerous Illinois cities are technically insolvent, but for now can pay the current bills. Pension obligations will eventually wreck many of them.

In addition to the previously mentioned cities, taxing bodies like the Chicago Board of Education are currently among the walking dead.

Illinois desperately needs to pass legislation that will allow municipalities to go bankrupt, but the law is still hung up in the legislature.

Illinois Crisis

For more on the bankruptcy and pension crisis in Illinois, please see ....

• Chicago's Only Possible Salvation: Bankruptcy - a Name That Cannot be Spoken
• Illinois Supreme Court Rules 2013 Pension Reform Law Unconstitutional; Chicago Teachers "Insulted by 7% Pay Cut Offer"
• Yield on Chicago School Bond Offering Hits 5.63%; Debate Over Risk; Miracles Not Coming; Bankruptcy the Sensible Option

Every delay in passing much needed bankruptcy legislation hurts the cities that need to file, while exacerbating the problems for all Illinoisans in the meantime.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot

Mike "Mish" Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction. Visit http://www.sitkapacific.com/account_management.html to learn more about wealth management and capital preservation strategies of Sitka Pacific.