Chicago Bonds are Now Junk, Says Rating Agency Moody’s

Junk BondsOn Tuesday, May 12, Moody’s Investors Service downgraded the city of Chicago’s credit rating to junk bond status. (Source: Moody’s, May 12, 2015.)

One day later, the rating agency downgraded the debt of Chicago public schools and park district to junk bond level. (Source: Moody’s, May 13, 2015.)

As a result of the downgrade, Chicago’s cost of borrowing will increase.

Chicago’s Huge Debt Burden

One reason for the downgrade is Chicago’s huge debt burden. The city’s unfunded liability from pension funds is at $20.0 billion, and that number is growing. This translates to a burden of $7,400 for every resident of Chicago.

Now let’s turn to Detroit. The Motor City’s unfunded pension burden is $3.5 billion, giving each Motown resident a $5,100 obligation. In comparison, Chicago’s per person pension burden is 45% higher than Detroit’s.

Other than the debt from pension plans, Chicago residents also have to carry a variety of overlapping governments such as Chicago Public Schools and the Chicago Transit Authority. According to a study by the Civic Federation, debt per capita in Chicago increased from $4,446 in 2002 to $9,683 in 2011. (Source: The Civic Foundation, last accessed May 14, 2015.)

Municipal Debt Crisis in the U.S.

High levels of municipal debt are not just a worrying sign for the Windy City; it should draw attention from policymakers across the U.S. In 2000, total municipal debt outstanding was around $1.48 trillion; by the end of last year, the number grew to a staggering $3.65 trillion. How local governments can pay their debt is a matter of urgency. (Source: Securities Industry and Financial Markets Association, last accessed May 14, 2015.)

One reason for the piling up of debt is that after the housing market crash, revenue from property tax declined sharply for many cities. And their governments did not adjust their spending accordingly. When you keep spending while earning less, you are going into deeper debt.

With Detroit already bankrupt, and Chicago on the edge, I wonder if the U.S. government will come in and protect the city from falling apart. If they do, though, it will further increase our national debt. In the long term, huge national debt is not sustainable.