Chicago’s Bonds Turn To Junk–As Could Be Expected

[Originally published by Market Urbanism]

 

1. The article I wrote this week for Forbes makes the connection between post-WWII urban renewal, and today’s tax increment financing. I realize that the two redevelopment policies aren’t identical, most notably not in scale. Urban renewal was a nationwide policy during an era of extreme central planning; TIF is funded at local and state level to bring redevelopment to targeted sites. But during its four-decade rise, TIF has reflected urban renewal’s flaws, perpetuating waste, cronyism, and property confiscation.

2. Another article I liked was by City Journal contributing editor Aaron Renn, called “Libertarians of Convenience.” It is about how urban progressives resist government regulations for their preferred activities, while calling for more regulations overall. It seems that the group hasn’t connected certain dots: while advocating for government growth outright, they become shocked when said governments impose regulations upon them that are pointless and arbitrary, not grasping that this is often the natural course of bureaucracy.

What explains these contradictions? A charitable explanation is that urban progressives—typically on the younger side—are just beginning to experience how excessive regulations can suffocate life in the city…But it’s hard to avoid thinking, too, that some of the inconsistency reflects elite biases. The things that liberal-minded city residents like and want to do—eat from hip food trucks, smoke dope, and other “bourgeois bohemian” pursuits—should be left as free as possible, consequences be damned…Those that they consider déclassé—Big Gulps, Marlboro Lights, McDonalds—should be restricted or even shut down. It’s regulation for thee but not for me.

What the urban Left doesn’t recognize is that the regulatory mind-set is nearly impossible to turn on or off, depending on what you like or don’t like. Many of the bans and rules that progressives impose on cities not only make life difficult for muffler shops, hardware stores, plumbing firms, bodegas, and other unglamorous operations; they also harm the enterprises that they love.

3. But perhaps the most noteworthy urban news story was one that many have anticipated: Chicago’s bonds reached junk level. On Tuesday, Moody’s downgraded city bonds backed by property, sales and fuel tax revenue from Baa2 to Ba1, or just below investment grade.

The move came in direct response to an Illinois Supreme Court decision which found that the state constitution prevents the legislature from restructuring pension obligations for government employees. This could prevent the necessary reforms to the very debt that first caused the city’s ratings to drop so low. The state of Illinois has an estimated $167 billion in unfunded retiree pension and health care obligations. Various government entities within Chicago and Cook County, meanwhile, have an estimated debt of $87 billion, and two-thirds of this is for unfunded employee liabilities. Taxpaying Chicago households will eventually be on the hook to cover much of both. Yet, as the court decision showed, officials at multiple levels of government have proven unwilling to reform these burdens, so beholden are they to public employee unions. The problem forced Moody’s to downgrade Chicago’s bonds in 2014, and now again.

But I would argue that outside forces informed Moody’s decision also. Earlier this year, I wrote in the American Interest about the legal dubiousness of the bankruptcies in Detroit and Stockton. These cities, too, had run up massive debts because of unfunded pension liabilities, and filed for bankruptcy to shed them. But rather than following traditional bankruptcy proceedings by paying back their creditors, they made almost full guarantees to their retired employees, while giving some bondholders mere cents on the dollar (or in the case of Stockton, less than one penny). These cases represented a reversal of the normal order in which creditors are paid in bankruptcy. They were driven in both cities by a populist impulse to protect unionized government workers and give large financial firms the finger. But for the article, I interviewed a half-dozen financial and legal experts who thought the deals could set a bad precedent. If indebted cities can just file for bankruptcy and then use it to shirk payments to financial firms, the mere threat of future ones doing so could increase borrowing costs. Chicago has long seemed next in line to file for bankruptcy, and its liberal politics mirror that of Detroit and Stockton. So perhaps by lowering the city’s bond rating, Moody’s is taking necessary precautions.