Brown: A vulture is circling Chicago

SHARE Brown: A vulture is circling Chicago

Mark Brodsky, who has taken an interest in Chicago bonds, has earned a reputation as a “vulture fund” operator. | AP file photo.

Follow @MarkBrownCSTA New York-based hedge fund manager who focuses on distressed government debt is telling the world that Chicago’s efforts to shore up its pension plans are far short of what’s needed.

Mark Brodsky, chairman of Aurelius Capital Management, contends that even if all planned or proposed city tax increases are approved, the city’s pension problems will only continue to grow worse for decades.

“While Mayor [Rahm] Emanuel has chipped away at the problem, the city has come nowhere close to identifying a solution,” Brodsky wrote. “While it will take years to fill the present deep hole, surely the hole should not be dug deeper still. Yet, that is exactly what the city proposes to do.”

Brodsky chose to make known his surprise concerns about Chicago’s finances in a commentary in Monday’s The Bond Buyer, the bible of the municipal bond industry.

Brodsky has earned a reputation as a “vulture fund” operator for his hard-nosed investment practices involving Argentina, Greece, Puerto Rico and other financially troubled governments and companies elsewhere around the world.

His business M.O. is to buy distressed debt at deep discounts and then demand payment in full when the debtor seeks to negotiate its way out of its problems.

Now Brodsky is taking an interest in Chicago. This can’t be good.


Follow @MarkBrownCSTHis only previously known connection here was as one of the minority creditors trying to take advantage of the Tribune Co. bankruptcy.

I’d say it’s a near certainty Brodsky is working some angle beyond his professed interest in making sure city employees receive the pensions they’ve been promised and that the sacrifices of Chicago taxpayers aren’t for nothing.

But it’s not entirely clear what that is.

By expressing his views to The Bond Buyer, the most immediate effect would be to raise concerns among investors holding city bonds. The firm declined Wednesday to disclose whether it holds a position in Chicago debt.

That doesn’t mean Brodsky’s information is faulty, only that it should be viewed with caution.

Others have argued the city is already too deep in pension debt to pay its way out and should seek bankruptcy protection to restructure its obligations to retirees and employees. That would require a change in state law that Gov. Bruce Rauner has said he supports.

Brodsky doesn’t come right out and say anything about bankruptcy, but he certainly beats around the bush.

He said his firm’s analysis of city pension finances indicates it would take an additional $1.1 billion contribution beyond what’s planned for 2016 to keep the pension funds from going into a deeper hole.

“If the city cannot muster the resources and political courage to take this first step now, surely the city will lack the resources and discipline needed to dig out of a far bigger hole down the road,” he wrote in The Bond Buyer.

Brodsky said that even if the city meets its steep contribution goals, the funding ratios for the pension funds will continue to drop and won’t make it back to 2015’s 31 percent funding level until 2033.

That assumes the city’s official actuarial assumptions are correct and that it makes its scheduled future contributions, he noted.

“If history is any guide, these assumptions will prove overly optimistic, and much more money will be needed,” Brodsky wrote.

As an example, he pointed out that city pension funds are still assuming a 7.5 percent rate of return on investments, while many other public pensions have dropped to 7 percent.

Laurence Msall, president of the Civic Federation, said Emanuel’s efforts to improve city pension finances are “steps in the appropriate direction” but that “it remains to be seen if it’s going to be enough.”

“These are improvements. They make the funds better. They’re not perfect,” Msall said.

In the meantime, a vulture is circling.

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