Moody’s, a major bond rating agency, announced this week it is downgrading Chicago’s debt to Baa1, just three ticks above “junk” status. According to Moody’s, the downgrade is meant to reflect the growing chasm of liabilities created by the city’s debt financing policies. Moody’s stated the future outlook for Chicago is negative.
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“Just a few weeks ago the Chicago City Council, at the prompting of Mayor Emanuel, voted for another $1.9 billion of borrowing with virtually no thought or discussion. This continued a pattern of fiscal recklessness that was a hallmark of the city government under Emanuel’s predecessor, Mayor Richard M. Daley, who regularly had the city borrow money without even beginning to pay down the principal until decades in the future. This ensured they could take credit for spending while leaving it to others to figure out how to cover the costs. Moody’s sees Chicago under its new mayor is continuing its old tricks. How could anyone have faith in the city’s ability to repay debt that has been issued with almost no thought for the future?”
“Chicago is another canary in the coal mine, where government solvency is threatened by entitlement programs that promise more than can be delivered. Union pension and other retirement benefits in local governments are the equivalent of Social Security and Medicare at the federal level. Politicians will gain votes today by promising benefits that will have to be paid for in the future. Local governments must move to defined contribution programs and Social Security and Medicare must be reformed.”
“Having monitored and documented Detroit’s fiscal and economic decline for four decades, it is no surprise that Moody’s finally felt obliged to cite specific reasons for Chicago’s similar path to insolvency and bankruptcy. Evidence of the fiscal end-game is even more overwhelming in Chicago’s case, primarily reflecting the city’s intractable debt and unfunded liabilities. Both facets of Chicago’s finances are out of control and resist any current or foreseeable efforts to bring them into alignment with long-term fiscal or economic equilibrium.
“A responsible fiscal response by city leadership would entail engaging a fiscal crisis committee, with private-sector expertise, to assign only the foremost municipal priorities for funding and eschew all non-essential functions. Competitively bid services, as well as the renegotiation of ruinous, defined benefit contracts, are merely the essential starting point for durable reform.”
“The downgrade of Chicago’s debt rating is no surprise. Unfortunately, this problem also plagues the state of Illinois and many other state and local governments. The runaway pension mess points out why both George Meany, former head of the AFL-CIO, and Franklin Roosevelt purportedly were opposed to government unions. What’s so sad is that the painful settlement of these large state and local deficits, not to mention the federal deficit, will ultimately be placed upon the backs of our children. Unless we’re very angry at our kids for not writing more often, this is blatantly unfair. This is especially ironic given that the adherents to the political philosophy that doesn’t hesitate to spend money the government doesn’t have often condone its spending on the grounds of “fairness.”
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