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Chicago Nears Junk Bond Status – The Next Detroit?

September 18, 2013 11:03

Each Chicago household is on the hook for more than $61,000.

By Ted Dabrowski, Vice President of Policy at Illinois Policy Institute

While all eyes are focused on a solution for Illinois’ state-run pension systems, Chicago’s own debt crisis is looming.

Chicago taxpayers are on the hook for more than $63 billion in pension, health insurance and other debt. That’s the total debt of the city and its sister governments, as well as Chicagoans’ share of Cook County debt.

In total, each Chicago household is on the hook for more than $61,000.

Chicago debt

Chicago’s pension crisis isn’t new, but Detroit’s bankruptcy has brought national attention to Chicago’s growing crisis. Just a day after Detroit filed for bankruptcy, Moody’s Investors Service downgraded Chicago’s debt by a rare three notches. Chicago is now just four notches away from junk-bond status — and any further downgrades mean the city could face problems borrowing money.

Standard & Poor’s Rating Services followed late last week by threatening its next downgrade. It placed the city’s debt on a “negative outlook.”

Without pension reform, Chicago Mayor Rahm Emanuel will be forced to raise taxes or dramatically cut government services.

Emanuel knows he can’t raise taxes. Chicago has lost more than 200,000 residents in the last decade and the city’s population is lower now than it was in the 1920s. America’s slowest-growing major city can’t afford to chase away even more taxpayers.

To make matters worse, Chicago’s services are already faltering. Chicago Public Schools closed nearly 50 schools this year, forcing children and families to travel across gang lines. Nearly 3,000 school employees have been laid off. And the city’s crime rate is among the worst in the nation.

Higher taxes, taxpayer flight and an inability to provide core services contributed to Detroit’s demise — and it’s a trend that Chicago must reverse.

Fixing Chicago’s pension crisis will require help from Springfield. Lawmakers need to follow the lead of the private sector and move all workers to 401(k)-style plans for all work going forward — an idea that Emanuel supports as an option for the city’s new hires.

From Paul Kersey
Director of Labor Policy

When it comes to Detroit and Chicago, there are some important differences, but there are a lot of disturbing parallels, too. Here are some of the factors that led to Detroit’s demise:

Growing deficits — Sound financial practices, such as balancing a budget, may not be exciting. But having the discipline to honestly balance a budget and resist the urge to continue overspending means government sets priorities and makes the most of the resources it has. By contrast, large deficits, or reliance on budgetary tricks to hide spending, are clear signs of a city that’s in trouble. The ratings on a city’s bonds are one quick way to assess a community’s budget situation. Detroit’s bond ratings are junk, meaning the city is expected to default on many of its debts. Chicago’s bond ratings are declining – Moody’s Investors Service dropped its rating of Chicago’s bonds last month to A3 from Aa3, and at the time signaled that ratings are likely to go lower.

Chicago is in much better shape than Detroit, but it is getting into a potentially deadly cycle where investors consider Chicago bonds riskier and riskier. As the risk goes up, the city has to pay higher and higher rates of interest, making it harder for the city to balance its budgets.

City forced into massive layoffs — Union bosses hate to make concessions, but sometimes they really are necessary. Just like in the private sector, when an employer needs relief from costly benefits and a union refuses to allow them, the result is workers being laid off. This happened in Detroit in 1978 when the police officers’ union demanded, and eventually got, an expensive cost-of-living allowance. Over the next few years Detroit laid off nearly a quarter of its police force, and crime rates shot up dramatically — 1978 may have been the turning point in Detroit’s collapse.

Chicago is already seeing something similar in its public schools. Last fall’s teacher strike ended with a contract including hefty raises that Chicago Public Schools, or CPS, cannot afford. Facing a billion-dollar deficit, CPS laid off more than 2,400 teachers since it inked the new contract.

Breakdown of basic services — Detroit’s police force is emaciated – it takes an hour on average for police to arrive after a call, and fewer than one out of eight murders were solved in 2012. But the failure of Detroit’s basic services was made obvious during the Devil’s Night fires, which were devastating physically and absolutely crushed the morale of city residents. City officials knew what was coming, but were powerless to stop it.
Illinois Policy Institute