The Fed Is Corrupt: Period
The Market Ticker - Commentary on The Capital Markets
Logging in or registering will improve your experience here
Main Navigation
Display list of topics
Sarah's Resources You Should See
Sarah's Blog Buy Sarah's Pictures
Full-Text Search & Archives
Legal Disclaimer

The content on this site is provided without any warranty, express or implied. All opinions expressed on this site are those of the author and may contain errors or omissions.

NO MATERIAL HERE CONSTITUTES "INVESTMENT ADVICE" NOR IS IT A RECOMMENDATION TO BUY OR SELL ANY FINANCIAL INSTRUMENT, INCLUDING BUT NOT LIMITED TO STOCKS, OPTIONS, BONDS OR FUTURES.

The author may have a position in any company or security mentioned herein. Actions you undertake as a consequence of any analysis, opinion or advertisement on this site are your sole responsibility.

Market charts, when present, used with permission of TD Ameritrade/ThinkOrSwim Inc. Neither TD Ameritrade or ThinkOrSwim have reviewed, approved or disapproved any content herein.

The Market Ticker content may be sent unmodified to lawmakers via print or electronic means or excerpted online for non-commercial purposes provided full attribution is given and the original article source is linked to. Please contact Karl Denninger for reprint permission in other media, to republish full articles, or for any commercial use (which includes any site where advertising is displayed.)

Submissions or tips on matters of economic or political interest may be sent "over the transom" to The Editor at any time. To be considered for publication your submission must include full and correct contact information and be related to an economic or political matter of the day. All submissions become the property of The Market Ticker.

Considering sending spam? Read this first.

2018-05-14 10:50 by Karl Denninger
in States , 338 references Ignore this thread
The Fed Is Corrupt: Period
[Comments enabled]

This flat-out blows my mind.

The State of Illinois has a very large unfunded pension liability and will likely have to pay much of it off by raising taxes. The Illinois Commission on Government Forecasting and Accountability estimated the state’s unfunded liability at $129.1 billion in mid-2017,[1] which was about 19% of state personal income.[2] Benefits to public employees are protected under the Illinois Constitution, and a recent attempt to reduce the unfunded liability by reducing retirees’ benefits was struck down by the Illinois Supreme Court.[3] So, assuming that the state can’t reduce its current pension obligations and that it wants to maintain its current level of services, Illinois residents are going to have to pay higher taxes. What’s the best way to do it?

From bad questions come bad answers.

The State Constitution can be amended.  There are multiple ways to do it, I might add, and what is being proposed here can quite-easily lead to a rather lawless manner of amendment.

In our view, Illinois’s best option is to impose a statewide residential property tax that expires when its unfunded pension liability is paid off. In our baseline scenario, we estimate that the tax rate required to pay off the pension debt over 30 years would be about 1%. This means that homeowners with homes worth $250,000 would pay an additional $2,500 per year in property taxes, those with homes worth $500,000 would pay an additional $5,000, and those with homes worth $1 million would pay an additional $10,000.

Oh really?

The rest of the paper goes on to try to explain how it raises the revenue and why it will work, which devolves down into "property can't get up and walk out of the state."

True enough, but not material.

The Fed is full of people who handle zero-coupon bonds all day long.  A zero coupon bond is one that is sold at a discount to its face value representing the future payments that otherwise would be made in coupon.  Since the amount of the coupon is known, so is the discount at original issue.  It's very easy to figure out the discounted cash price since one knows the amount to be paid and when.

Well?

Let's take their example.  A property "owner" with a $250,000 house would pay $2,500 a year.  Let's assume this really does retire the debt in 30 years.  Well then, that means the zero coupon basis of the property just went down by $75,000 (30 years * $2,500.)

As The Chicago Fed notes the market will instantly reprice the property downward to account for this tax liability.  But guess what -- assessments are on value!

So what happens?

Said owner goes to the county assessor and immediately protests his taxes, because his house isn't worth $250,000 -- it's only worth $175,000.  He's not going to pay $2,500 a year -- not the first year, and not any year after that either.

So what happens next?

The state comes up short, and what do they do?  They raise the tax again.

Guess what?  The property owner now gets the new discount figured out almost instantly by the market and he protests again.

Eventually someone picks up either a ballot or a lot of people pick up rifles, having been dispossessed of virtually the entire value of their property.

Oh, and as for businesses?  They can leave, and they can do so quickly.  Most businesses lease their property and most leases are either "triple net" or similar.  There will be plenty of walk-outs over this and lending covenant violations by the owners of said buildings, with the businesses telling the owners of the property to sue them if they'd like but they consider this a force majure event and ain't sticking around to get reamed in this fashion.

Those businesses that do remain will raise prices, which of course will be just fabulous for all those people who just saw 30% of their home equity go up in smoke.

Finally if you think Illinois residents have "benefited" from the past "services" of said employees, well, that old bridge over the Chicago River (pick one) might get dropped into said river if you run that load of crap on too many people.

Leaving aside the political ramifications of this, which might well not remain peaceful, the economics simply don't work.  What's worse is that the Chicago Fed knows this because the Chicago Fed, like all banks (Federal Reserve or not) are bond dealers and are well-versed in exactly how instruments that behave like bonds have discounted cash flows either accruing to them or flowing from them impact their valuations.

Good luck Illinois.  With this sort of horsecrap flying out of the mealy-mouthed folks who ought to be considered felons you're gonna need it.

Go to responses (registration required to post)
 

 
Comments.......
User: Not logged on
Login Register Top Blog Top Blog Topics FAQ
Showing Page 1 of 2  First12Last
User Info The Fed Is Corrupt: Period in forum [Market-Ticker]
Wifi
Posts: 647
Incept: 2013-02-13

Seagrove Beach
Report This As A Bad Post Add To Your Ignored User List
I believe they tax the sidewalks?

http://www.ilga.gov/legislation/ilcs/ilc....



----------
Hurricane Evacuation Plan
1.Grab Beer
2.Run Like Hell
Themortgagedude
Posts: 10648
Incept: 2007-12-17

saint louis
Report This As A Bad Post Add To Your Ignored User List
The only way to do this is to declare the state insolvent and start over. Pay what can be paid on the pensions. I'm 54 and have many friends from college living in Chicago. Almost every one of them that I am in contact with is thinking about moving out of state. Holding on until kids get thru school in lots of cases. One friend just moved to Indiana across the state line and told me he could buy a new Mercedes easy for what he was saving on property taxes.

----------
I think its time we ask ourselves if we still know the freedoms that our founding fathers intended for us. Ronald Reagan 1964
Mr_clueless
Posts: 42
Incept: 2009-06-04

Report This As A Bad Post Add To Your Ignored User List
Corruption by state
https://fivethirtyeight.com/features/ran....
Nebraska looks like the winner. :)
Hk
Posts: 9
Incept: 2015-07-29

United States
Report This As A Bad Post Add To Your Ignored User List
They are also counting on interest rates staying low, which won't hold water if the fed continues to raise rates as well.
Supertruckertom
Posts: 1955
Incept: 2010-11-07

USA
Report This As A Bad Post Add To Your Ignored User List
Waiting to see if my comment makes the light of day on that page.

----------
Preparing to go Hunting.
Wa9jml
Posts: 142
Incept: 2017-04-29

DeKalb, Illinois
Online
Report This As A Bad Post Add To Your Ignored User List
I am stuck in Illinois until my Dad leaves this Vale of Tears. But, I already have enough money to buy a nice place in a money market account. When he goes, I am out of this doomed state like a missile.

I already paid my property taxes this year. With several exemptions, I pay about $3300 a year for a house built in 1956 that with a stiff tail wind is worth about $90,000. It is assessed at $126,000, because if the assessments actually reflected fair market value, all the school districts and many of the other local governments in this county would all go belly up. I could take the cash I pay in for property taxes, and burn in in my Weber cooker, and not notice any difference in the quality of services I receive.

When I bought this place 30 years ago, I paid about $900 a year in property taxes. The idiots in the local school district lied through their teeth to get a referendum passed to build a Chicago Suburban level high school, and the student performance has actually dropped since they built it. I have never had a student in that district, and at this late date I never will. So, why do I have to pay to educate everyone else's kids?

Most of the local government pensions here are underfunded just like they are in the rest of the state. I suspect that the Chicago Fed tax increase will be funneled to Crook County just like the rest of the money in this state is.

Go long on tar and feathers!
Patriarch
Posts: 1182
Incept: 2007-10-18

your account summary
Report This As A Bad Post Add To Your Ignored User List
Illinois Investment Stratagem:

Sell in May and run away.

----------
Our elected take an oath to serve. Time to add: I will not serve in a capacity which I am not able to comprehend or am incapable of by mental defect of any kind, nor will I use the excuse of intellective deficiency if found in violation of this oath/affirmation, which backs charging wayward politicians with treason.
Aztrader
Posts: 7990
Incept: 2007-09-10

Scottsdale, AZ
Report This As A Bad Post Add To Your Ignored User List
My accountant is already paying 70k on one story office suite building in the southern burbs of Chicago. His clients are literally destroying their buildings so that they are only liable for lot taxes. They need to vote on changing their constitution and remove all pension protections. The other choice is bankruptcy. Getting more blood out of people who are already bleeding from every orifice is a joke. Again, the leeches of society win while the worker bees pay.
Mrkarol
Posts: 28
Incept: 2015-12-15

Chicago
Report This As A Bad Post Add To Your Ignored User List
This is my favorite part ...

There are several good reasons to pay off Illinoiss pension debt through a statewide residential property tax:

Fairness: Illinois residents who have benefited most from the past services of governmental employees are more likely to be homeowners, so it seems reasonable that they should pay a larger share of the costs.

WELL F YOU VERY MUCH!!! How the hell does one make that correlation with a straight face and put that under fairness??!! How about busting your ass and saving for a long time to be a homeowner? Seems to me the truth is exactly the opposite... the folks that benefit the most from government services are NOT property owners.
Rollformer
Posts: 299
Incept: 2013-02-13

Report This As A Bad Post Add To Your Ignored User List
One of my fellow bar regulars when I lived in PA was a self-described slum lord. He was getting out of the business, and was down to one property, in a ****ty inner suburb. I asked what it rented for, and he said $850 a month. I thought that not a bad gross income. So I asked what his asked price was, and he said, "Sixteen". I was taken aback, because this is an odd number for a house. Is it $16? $1,600? $16,000? $16 million?

It turns out it was $16,000. I knew something was wrong, so I inquired about the expensive mechanicals (kitchens, roofs, wiring, etc), and he reported that most of it was fairly recent, and in passable condition. The taxes, on the other hand, were $6,000 per year. So, out of the $850 per month, $350 was available for profit and improvements to the property.

Now, is this slum because of the landlords, or is it because of the government (who incessantly complain about the condition of the housing stock)?
Tsherry
Posts: 1183
Incept: 2008-12-09

Spokane WA
Report This As A Bad Post Add To Your Ignored User List
So, the Illinoize system is ****ed.

They propose to 'fix it' with a property tax.

Property tax that will continue to be mismanaged as current property taxes have been for (at least) the past half century.

Mismanagement that has thus far and will continue to go unpunished, and in a few years time, will be bailed out with a proposed property tax.

Did I miss anything?

----------
Omne mendacium est.
Dcsleeper
Posts: 406
Incept: 2012-10-11

Northern VA
Report This As A Bad Post Add To Your Ignored User List
TSherry: Nope that pretty much sums it up.

I ran. Away.
Captainkidd
Posts: 1155
Incept: 2010-05-25

Houston, Texas
Report This As A Bad Post Add To Your Ignored User List
Quote:
In our view, Illinoiss best option is to impose a statewide residential property tax that expires when its unfunded pension liability is paid off.


Because, you KNOW they'll get it paid off, and cancel/eliminate the tax increase....
It's just TEMPORARY!!
But....it always is, isn't it?

----------
A lawyer with a briefcase can steal more than a thousand men with guns. --Mario Puzo

It is well enough that people of the nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution before tomorrow morning. -- Henry Ford
Beango
Posts: 773
Incept: 2009-06-05

Report This As A Bad Post Add To Your Ignored User List
Quote:
Said owner goes to the county assessor and immediately protests his taxes, because his house isn't worth $250,000 -- it's only worth $175,000. He's not going to pay $2,500 a year -- not the first year, and not any year after that either.

Unless the appraisers are complicit...
Also, wouldn't the system be flooded with complaints to the point that you are waiting around for a long time before your ticket is called, all the while paying through the nose?

Onelegged
Posts: 451
Incept: 2009-11-13

NW Colorado
Report This As A Bad Post Add To Your Ignored User List
1) House fire.

2) Moving van.

Illinois sounds like "paradise in the rear view mirror".

----------
The light at the end of this tunnel is a train and it's gathering speed.
Onelegged
Posts: 451
Incept: 2009-11-13

NW Colorado
Report This As A Bad Post Add To Your Ignored User List
It's not $2500 per year. It's an ADDITIONAL $2500 per year.

----------
The light at the end of this tunnel is a train and it's gathering speed.
Tickerguy
Posts: 152887
Incept: 2007-06-26
A True American Patriot!
Report This As A Bad Post Add To Your Ignored User List
Yep.

----------
Winding it down.
Themortgagedude
Posts: 10648
Incept: 2007-12-17

saint louis
Report This As A Bad Post Add To Your Ignored User List
They are already paying 3% in property taxes in many cases. Think about that. If you had a 30 year mortgage and paid the house off you still have to pay "rent" to the county in the form of taxes of about $600 per month. Now the want to raise that another $200 per month.

The thing is the taxpayers or homeowners deserve the squickening they are going to get. They didn't demand money be set aside to pay these pensions. And the pensioners deserve what they get when it goes bankrupt. Because they negotiated higher future payments and didn't demand funding of it.

----------
I think its time we ask ourselves if we still know the freedoms that our founding fathers intended for us. Ronald Reagan 1964
Wa9jml
Posts: 142
Incept: 2017-04-29

DeKalb, Illinois
Online
Report This As A Bad Post Add To Your Ignored User List
I am paying more each month in taxes than I used to spend in rent for a 2 bedroom apartment here back in the 1970s.
Mickey
Posts: 18
Incept: 2014-05-19

Chic
Report This As A Bad Post Add To Your Ignored User List
with all the comments thus far, no mention is made of how and why the pensions cost so much. Spiking for one reason.

High pay levels for another reason: I beleive the base pay rates are the highest in the nation.


We have freinds who taught in system somewhere in the Chicago areas for 30 years and retired with huge pensions...they set that up by obtaining MBA's 3 years before they retired, thus higher earnings for pension. Also many worked summer school the last 3 years and also took previously deferred vacation in the last 3 years.

The public workers also get a nice healthcare plan at retirement.
The system is just too costly and needs to be adjjsted.
Even if there is no imminent BK in IL, and taxes are raised, yes property values decline but those moving out of the state will continue.
As the healthy busineses move out the state will have significant tax receipts cuts and the economy will whither.

The number of years to that IL BK may change but its coming.

I moved back several years ago due to grandchildren. I do not know where I wil go next, but it might be out of the country as the US of A is in trouble.






Emg
Posts: 203
Incept: 2012-11-20

Canada
Report This As A Bad Post Add To Your Ignored User List
"So, why do I have to pay to educate everyone else's kids?"

You're not paying to educate everyone else's kids.

It's worse than that.

Much worse.

You're paying to NOT educate everyone else's kids.
Cobra2411
Posts: 11774
Incept: 2007-06-26
A True American Patriot!
Philly P.a.
Report This As A Bad Post Add To Your Ignored User List
Mickey, Pa is similar and I'd expect most are. They're set up to let you game the system in the last 2-3 years and significantly increase your retirement pay. It's mathematical impossible IMO that someone can earn enough to set aside while they are working to allow them to collect their highest pay for as long or longer than they've worked. The rates they use to calculate the pension investments are simply unavailable without significant risk.

We can argue the discount, and I'm sure they have a counter argument about how it benefits the state and values will rise, blah blah blah... But, the immediate effect of a 1% increase in costs is a 10% reduction in buying power in order to keep the monthly payment the same. And since that's the standard of financial knowledge - how much can get afford a month, it's going to have an immediate impact as most buy at their maximum. Actually, most buy above their maximum and grow into the payment. So this is likely to **** not only those on a fixed income but those who recently bought and pushed the limit of affordability. Those people were under water from day one and are now another 10% under. I want to say from memory it takes 7 years before you can sell and cover settlement costs based on principal reduction alone, all of things equal. That's why as a minimum people should put 10% down. 20% covers the loss from a distressed sale. But hey, we took that personal responsibility and foisted it onto the taxpayers, why not some more...

In the end someone gets ****ed... Who is going question. It's government, so probably everyone eventually...

----------
Government: A device that allows you to get blind ass drunk and your children die from alcohol poisoning.
Bodhi
Posts: 417
Incept: 2008-02-23

Georgia
Report This As A Bad Post Add To Your Ignored User List
George Harrison wrote a little ditty about taxes over 50 years ago

Let me tell you how it will be
There's one for you, nineteen for me
Cuz I'm the taxman, yeah, I'm the taxman

Should five per cent appear too small
Be thankful I don't take it all
Cuz I'm the taxman, yeah I'm the taxman

If you drive a car, I'll tax the street
If you try to sit, I'll tax your seat
If you get too cold I'll tax the heat
If you take a walk, I'll tax your feet

Taxman!
Cuz I'm the taxman, yeah I'm the taxman

Don't ask me what I want it for
If you don't want to pay some more
Cuz I'm the taxman, yeah, I'm the taxman

Now my advice for those who die
Declare the pennies on your eyes
Cuz I'm the taxman, yeah, I'm the taxman

And you're working for no one but me
Taxman!
Whitehat
Posts: 438
Incept: 2017-06-27

The People's Republic of New York
Report This As A Bad Post Add To Your Ignored User List
they are sure to figure out a way for the property taxes to not go down regardless of assessed value, millage anyone.

the reason that this is so difficult to address is that a very large percentage of the country's population and a super large percentage in many localities work for the govt. and have these pensions and retirement health benefits. in an earlier ticker we were discussing this to some degree. these pensions support a massive retirement industry and large communities in other states not to mention other related industries.

sadly it got no mention from our supposed great leader Trump that the military was converted massively to defined contribution. think about how ****ed up this is. a combat veteran does not rate the assured retirement of a pencil pusher at some govt. office. maga my ass.

i live in kind of ground zero for a large subset of the most spoiled city worker ****s. since the early 1980's our cops and firefighter after approx. 20 years start collecting their pensions and getting complete medical benefits. the latter makes starting a retirement business very easy as it is a cost that must be addressed for normal people. even other municipal services here get an amazing retirement. yes, some jobs have a physical hard limit, but there are many constructions workers, tradesmen and business owners who manage to work at their trade later in life or find another job between the physical job and death or Medicare eligibility. and the numbers would astound. we have retired garbage men at age 50 collecting six figures in retirement with full medical. their own union says that for every man working the city is paying three. oh, and if it escaped you, they earn big money for low skilled work which is why the pension is based so high. this is truly a mess and affects the culture too. there have been three generations where i live where everyone assumes from primary school that they will get a city job, so screwing around and not developing a work ethic or studious way is not part of the plan. they literally will do nothing until they get the city job or some other cushy union position in something like a utility which is quasi govt. employment with all of the benefits. when there are few penalties for being a ****up or one earns grossly more in comparison to ability or productive work a warped sense of life ensues. not to mention that whole communities sprout up around this easy money. where i live, the locals have literally never felt the effects of any economic crisis and are stunned if one can ever show to them the effects on other Americans. i truly believe that the movie "Idiocracy" was conceptualized in my community. and this is in a borough of a major city. this is how truly big and serious the problem.

----------
There are two ways to be rich: One is by acquiring much, and the other is by desiring little.
snow, seasons, distance and dirt roads: SSDD
"Be not deceived; God is not mocked; for whatsoever a man soweth, that shall he also reap" (Gal. 6:7)
Login Register Top Blog Top Blog Topics FAQ
Showing Page 1 of 2  First12Last