Dichotomy, Demographic Transformation,
 Urban Renaissance & Bankruptcy
DAI’s 8/10/19 Newsletter, Top in the Housing Cycle & Looming Insolvency , debunked the myths surrounding a shortage of homes priced over $500,000. Using the August, 2019 Real Estate Market Outlook by, let’s continue and debunk the myths surrounding the demand for housing.

After peaking in 2006, existing home prices started to climb in 2012 and now exceed the previous high. Despite population increasing by 50 million since 2000, the flattening existing home sales remain well below the pre-financial crisis high and the year 2000.

Unlike existing home sales and prices, the number of households did not dip during the financial crisis and continues to march higher. However, home ownership rates peaked prior to the financial crisis and have not recovered.

Millennials born during the 1980-1998 period total almost 90 million today. While they represent the biggest block of workers, the combined millennial group (youngest & oldest) have the lowest home ownership rate.

Based on the latest Census Bureau data, the millennial home ownership rate of 35% is far below the national average of 69%.
Student loans, affordability, investment concerns, memories of the financial crisis, huge non-mortgage operating/maintenance costs, cohabiting and the deferral of marriage are no doubt all playing a role in home ownership decisions.

Nevertheless, there can be no doubt that millennials increasingly prefer urban living, amenities and the flexibility of renting over home ownership.  Even when they do decide to raise a family, millennials are less likely to leave the city than previous generations.

Urban living and renting is also in sync with the prioritization of higher paying jobs, convenience, walkability, proximity, liquidity, freedom, sharing, downsizing, green living, socialization, making a difference, digital dependence and the experience fixation. 
In conjunction with lifestyle changes, the importance of home ownership is evolving. In short, owning a home is far less important to Lollapalooza loving millennials than previous generations This is not the end of the housing market, but the rental trend has and will continue to undermine the alleged pent up demand for traditional homes . The urban migration has also taken a serious toll on the rural community. 
Seeking public support, the well intentioned Mayor Lightfoot is expected to publicly discuss the inherited 2020 budget shortfall before the end of August.

While Chicago is not the only large Illinois city with a pension-driven budget gap, the shortfall could exceed $1 billion.  Beyond the 2020 shortfall, an additional $1 billion in mandated pension contributions will be required by 2023 due to Chicago’s low pension funding. Yet to be negotiated pay raises for teachers, police and firefighters will add more fuel to the fiscal fires.

Lacking state assistance and failing to get Chicago’s pension debt consolidated in a new statewide system, Chicago residents will have to shoulder new taxes and fees. The new taxes and fees will not improve the pension system, but rather close a short-term budget gap.
To placate residents, efficiencies and service consolidation will no doubt be part of the Mayor’s discussion. This is important because while tax hikes are repetitive, they are rarely accompanied byspending cuts. WITH MANDATED PENSION CONTRIBUTIONS INCREASING ANNUALLY FOR THE NEXT DECADE, ILLINOIS AND CHICAGO NEED A FISCAL PLAN, NOT TAX PLANS. Like tax hikes, transferring government owned assets to pension funds is not a fiscal plan. 
As the state’s economic engine, Chicago’s pension problems demand a fix beyond short term strategies that compound the longer-term problem. After decades of corruption and mismanagement, officials cannot tax or borrow their way out of the fiscal crisis

Unlike states, but requiring state approval, cities and counties are eligible for bankruptcy. Bankruptcy is a last resort type of strategy with threshold requirements. It is also complicated, expensive to arbitrate, initially disruptive and requires policymakers to make tough decisions. While the negotiated haircut would be opposed by the unions and the elected officials they control, the two factions would quickly queue up once Chicago can no longer pay their bills.
Beyond the shared/negotiated haircuts and with the necessary oversight, a growth-oriented recovery plan with benchmarked strategies could end the fiscal crisis, right the financial ship, hasten the renaissance and ensure a long-term solution. The recovery plan could also REVIVE CHICAGO’S AILING HOUSING MARKET. 
To facilitate growth, the recovery plan must be structured to retain and attract residents, businesses and investors. If the recovery plan does not resolve the structural issues, they will haunt or preclude the recovery.  

Despite the $8 billion increased contribution and good investment returns, the COGFA pegged Illinois’ unfunded pension liability at $134 billion for the year ending June, 2018, up from $129 billion in 2017.

Not included in the Illinois debt, Chicago has about $34 billion in outstanding debt, including unfunded pension liabilities in their four pension funds and retiree healthcare. The Chicago funds are also among the worst funded. See Truth in Accounting for more.

Unfunded pension liability for the 650+ suburban and downstate police and firefighter funds was estimated at $11 billion as of 2017. 
Despite the bull market in equities, robust economic expansion and increased contributions, THE COMBINED FUNDING RATIO OF ALL THE PLANS IS LOWER TODAY THAN IT WAS PRIOR TO THE FINANCIAL CRISIS and well below the 90% required by 2040.  
According to the Illinois State Comptroller, the state’s backlog of unpaid bills has dropped from $16 billion to about $6.6 billion, a dynamic number. 

Growing rapidly and contributing to the resource strain, Illinois’s unfunded retiree health insurance liability for state workers was estimated at $73 billion in 2016, up from $40 billion in 2007. See Wirepoints for more.
While there are certainly other state and local government debts, the five categories mentioned above total $259 billion. Using optimistic valuations, the debt is no doubt understated.  If more realistic valuations were used for the decade ahead, THE TOTAL DEBT AND UNFUNDED LIABILITY WOULD BE WELL OVER $300 BILLION. 
If actuarially paid with more realistic valuations, the debt funding would be a Giganotosaurus type consumer of the state’s annual revenue. The revenue consumption would be far more than the 25% kicked around today.  Because Illinois is not prepared for a meaningful equity market correction or an economic contraction, the debt is not sustainable.

Tax burdens can certainly be shifted, but that won’t change the need for revenue. Similar to killing the gambling initiative with too many taxes, shifting the exponentially growing property tax burden to commercial developers will simply claim another victim. 

Concerned over trade fears, a slowing global economy, an inverted yield curve, the durability of corporate earnings and the long in the tooth economic cycle, US equities have been under downside pressure since late July.

While recent German and Chinese economic data is weak, the US consumer, including retail sales, and labor markets remain a source of strength. As a non-trade dependent nation , the US economy has remained resilient to date.

Apprehensive about the trade war’s economic impact, the Fed cut rates for the first time since 2008. Given the over reliance on fiscal stimulus, record high federal debt, deficit and record low long bond yields, the Fed’s flexibility is somewhat limited. Expectations for a rate cut at the September meeting are no doubt already factored in, but the future path of monetary policy remains uncertain.

The yield curve inversion, negative global rates, demand for high quality fixed income and the six year high spurt in gold prices are all recessionary flags. The weaker outlook for corporate earnings and the contentious political environment have further eroded investor confidence and corporate spending plans. 

After numerous attempts to penetrate the 27,000 level on heavy volume over the last 18 months, the Dow declined about 2,500 points, or 9%, during early August before rebounding. A full 20% correction would take the Dow down to the 21,900 level, 4,000 points lower, and test the lows made in late 2018.

Fueled by trade rumors, rallies could be robust, but given the increased risks, debt loads, over reliance on fiscal stimulus, top heavy P/E valuations, broad topping action and increased volatility over the last 18 months, sustained equity gains are unlikely. While both nations need a solution, the trade war has become a long-term cold war of epic proportions.

Equity market corrections, recessions and bear markets may not be pleasant, but they are not unusual. Short term fluctuations cannot be predicted, but market conditions are not in sync with the 7% assumed returns used by public plans and high risk alternative investments.  
Being the least prepared , a 20% equity market correction and or an economic contraction would wreak havoc on poorly managed states like Illinois and New Jersey Given the dire financial condition, Chicago would also feel the pain. With near junk bond status, Illinois is in no position to bail out Chicago and neither are the overburdened taxpayers In short, HISTORY MAKING MUNICIPAL BANKRUPTCY IS ON THE HORIZON. 
Taxes are particularly relevant because in addition to record high debt that continues to increase, the escalating state and local taxes are already among the highest in the nation. Click HERE to see how high Illinois taxes really are by category.  

As college graduates increasingly reject suburban life for the amenity rich urban core, former industrial areas - like Chicago’s West Loop - have become home to thousands of new workers. Because many live in nearby upscale rental complexes, the concentrated spending benefits the neighborhood.

Deferring marriage, parenting and home ownership - including mortgages, property taxes, maintenance & train schedules - these young, educated and reasonably affluent millennials have sparked growth in Chicago’s extended downtown area. 
The demographic and economic transformation is a real dichotomy because the downtown Chicago area growth is at odds with the flat or declining population in most of the metro and collar counties. The population loss has been particularly acute among low-middle income African Americans on the Chicago’s Far South Side, many of which have moved to the suburbs. 
While Chicago may be home to the nation’s fastest growing downtown area, the disinvestment in the surrounding area is what makes Chicago’s Business District (CBD) job and population growth unique.

  • Population in the downtown Central Area - neighborhoods within two miles of City Hall - increased by almost 100,000 since 2000 and no doubt exceeds 250,000 today.

  • Chicago’s 25-39 year-old population grew 16% over the 2005-2017 period while the rest of Cook County and the collar counties declined.

  • During the same period, Chicago’s population of 25+ year-olds with a bachelor’s degree or higher grew 42%, far more than the rest of the metro.
In addition to population growth, the CBD dominates job growth. According to HFF , jobs in the CBD increased by 134,000, or 28%, since 2010 while the rest of the city increased by 43,000. Totaling more than 613,000 and driven by the growth in services, the CBD job growth was double the metro’s growth.
  •  As noted by Ed Zotti in the recent Sun Times article, Where the Jobs Are in Chicago, the number of jobs in Chicago hasn’t changed much over the last half century, but the location and type has changed.
  • More than 50% of the city’s 1.2 million jobs are located downtown today, up from 40% in 1972.  While the downtown jobs are at a record high, jobs in the rest of the City declined by 30% since1972.
  • Similarly, manufacturing jobs declined by 372,000 while service jobs increased by 450,000 over the same period. The service job growth is expected to continue, but totaling only 63,000 today, the lost manufacturing jobs are not coming back.
Employing over 167,000 workers, Chicago is the nation’s 6 th largest tech hub and among the fastest growing.  

In search of talent, customer closeness, affordability, availability and transportation, downtown Chicago leads the nation in corporate relocations . The city also has a major footprint under other business expansion, luxury home rental development and startups. 

Based on data from the Center for an Urban Future , the number of startups in Chicago increased from 908 to 3,359, or 27%, between 2008 and 2018, the nation’s seventh fastest growth rate.
Chicago is not the only city to experience reverse migration and/or demographic inversion, but few have benefited from the transformation like Chicago’s downtown area. Despite the spectacular renewal of the city’s urban core, CHICAGO AND ILLINOIS ARE FACING INSOLVENCY AND POISED TO MAKE MUNICIPAL BANKRUPTCY HISTORY.
KILLING THE GOLDEN GOOSE: Transferring The Tax Burden To Developers
The demand emanating from the CBD’s demographics, educated talent pool, job creation, tech status, corporate relocation and continued business expansion remains robust. In sync with that demand, developers continue to unveil plans for capital rich, mixed-use, high quality residential and retail product, including mega developments that will further transform the area.
In contrast to projects already on the books, RECENT INVESTMENT SALES AND INTEREST IN NEW PROJECTS HAVE PLUMMETED According to a recent report from MBRE, the decline has been fueled by uncertainty surrounding the fiscal crisis, assessments, future tax bills and reduced investment returns.
The dual fiscal crisis at the state & local level, new political faces, a revised property assessment system, the potential for exponentially increasing property taxes, the federal shakedown investigation, crime and economic concerns over the trade war are all extracting a toll. In other words, enthusiasm over the explosive downtown CBD growth is being tempered by uncertainty.

Rather than reduce spending or seek a solution to the fiscal crisis, officials have put commercial developers in the crosshairs. Transferring the property tax burden to commercial developers would generate revenue, but claim another victim at the same time. 
Given that spending is unlikely to be reduced, the transfer may end up as just another tax. If so, commercial developers and home owners would both be subject to excessive taxes, thus killing the goose laying the golden eggs. In addition to an already weak residential market, the higher taxes on developers could undermine the local economy and slow the downtown CBD boom. 
With near junk credit ratings at the state and local level, Illinois and Chicago are both facing a fiscal crisis. Ignoring other shortcomings of GASB reporting, but using more realistic valuations, the state and local debt is much higher than reported or generally recognized. 

Despite increased contributions and a decade of mostly good investment returns, the record debt continues to increase while the pension funding ratio declines. Like the debt and despite already high and ever increasing taxes, the need for tax revenue continues to grow.
Diverting much needed resources, Illinois is already channeling a significant percent of state sourced revenue to pension contributions. While recognizing the recently increased contributions, the latest Pew research on The State Funding Pension Fund Gap notes that Illinois needs to contribute much more to avoid falling below their net amortization benchmark. As you can see, this can’t go on.

Looking at the possibility of low or negative returns in the decade ahead, Illinois is among the state’s least prepared for an equity market correction/and or a recession. The reliance on overly optimistic assumed returns and high risk/high fee alternative investments could further undermine investment returns. 
Given the already high taxes, the continually growing debt burden is not sustainable. In short, THERE IS NO SOLUTION WITHOUT BENEFIT CUTS AND/OR INSOLVENCY.
Illinois is not yet eligible for Chapter 9 Bankruptcy, but a pioneering and successful restructuring in Puerto Rico could change that. With state approval, Chicago could, however, pursue a bankruptcy solution.

Facing a taxpayer revolt, the day of restructuring will arrive when Chicago can no longer borrow to pay their bills. Given the peak in the equity/economic cycle, that day may be approaching. Because the extended downtown Super Loop area has a spectacular future, the day restructuring starts can’t arrive soon enough, particularly since revenue hungry officials have put commercial developers in the crosshairs.  
Chapter 9 is no walk in the part and while it would be challenging initially, it could provide a solution, something elected officials have failed to offer. With proper oversight, taxpayer representation and a pro-growth recovery plan with benchmarked strategies, THE EXTENDED SUPER LOOP’S ECONOMIC ENGINE COULD PUSH OUT LIKE AN ALIEN AMOEBA AND REVITALIZE THE CITY, THE COUNTY, THE METRO AND A CHUNK OF THE STATE.
Unlike higher taxes and reduced services, the pro-growth recovery plan could spark a much needed recovery in the residential home market, something home owners and realtors should be championing. In short, it’s time to unleash the organic Renaissance Dogs and retire the elected Reservoir Dogs. 

Because the feeding hogs will suckle until they can suckle no more, corrupt, compromised and inept elected officials must not represent taxpayers during the negotiated restructuring process. Like Mexican police, these officials believe their right to suckle is an inalienable right.

Because Chapter 9 - a portion of the US Bankruptcy Code devoted to the reorganization of municipalities & other local entities - has historically conferred participation status to a very limited category of taxpayers, participation and representation under municipal bankruptcy is an evolving area. 
Taxpayers are allegedly represented by their elected officials. However, representation by elected officials is not sufficient for bankruptcy purposes, particularly when officials have proved corrupt, inept and impaired by creditor relationships , all key dynamics. Indeed, higher taxes, declining property values and reduced services should not and must not be shouldered by taxpayers without a seat at the table.
Given the importance of the recovery plan, ongoing oversight and taxpayer representation during the restructuring process, DAI has changed their business model. Going forward, DAI will devote all resources to Illinois analytics, including the fiscal crisis, local economy, housing market, luxury homes, Super Loop expansion, block group/census tract analysis, the tech scene, documented migration, skilled immigration, the looming bankruptcy and Municipal restructuring.

DAI will also provide home owners, investors and realtors with insight on HOW TO POSITION AND INVEST DURING RESTRUCTURING.
For more on taxpayer representation during Municipal bankruptcy, see Who Pays the Price? The Necessity of Taxpayer Participation in Chapter 9 by C. Scott Pryor, Professor, Campbell University, Norman Adrian Wiggins School of Law.
Because impaired officials will do everything possible to preclude taxpayers from gaining representation at the negotiating table, NOW IS THE TIME TO PIONEER & DEVELOP TAXPAYER STRATEGY applicable to municipal bankruptcy. Without a seat at the table, resident taxpayers will pay for the sins of their elected officials twice.
To find out more about taxpayer representation, committee selection, communication and investing during Municipal restructuring, click HERE to subscribe to DAI’s twice monthly newsletter. DAI’s complimentary subscriptions end this month. To continue receiving the newsletter, you must subscribe. 

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Headed For the Gallows of Chapter 9 Bankruptcy, the City of Chicago, Chicago Public Schools &
Cook County Are a Simultaneous Trifecta
- Bankruptcy Maven-

This information has been taken from sources believed to be reliable, but accuracy and completeness cannot be guaranteed. All rights reserved. DAI publications may not be reproduced or distributed without the prior permission of the publisher. Assuming full credit is given, output can be quoted and/or referenced. Columns and freelance articles are also available
All Rights Reserved. © 2019 Data Analytics Illinois, Inc.
Phil Chiricotti, Editor
Data Analytics Illinois, Inc.
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