Chicago and Detroit: Trading places?

Chicago and Detroit: Trading places?

As Chicago slides toward insolvency, the Motor City is trending upward.

If current trends mean anything, it looks like Detroit and Chicago are trading places – at least financially.

On July 29, Detroit received an investment grade rating from Standard & Poor’s Ratings Services on a $245 million bond issue, just seven months after the Motor City exited from the nation’s largest-ever federal bankruptcy.

Chicago, on the other hand, is headed in the opposite direction. The city’s credit rating is in junk-bond territory after a series of recent downgrades. And it seems more downgrades are on the way.

Chicagoans may take solace in the fact that Detroit still has a long way to go before it’s out of the woods. The city’s $245 million bond issue received an investment-grade rating only because the income-tax revenue backing the bond will bypass city coffers and go directly to the bondholders. The city’s overall credit is still rated in junk bond territory at “B” – well below investment grade. But that’s still higher than its previous rating of “C.”

After nearly two years of restructuring, Detroit has good news that’s driving its ratings higher. The city’s revenue has been rising for the past four years and it’s finally balancing its budget, according to city officials.

That contrasts with Chicago and its difficulties in solving a growing pension crisis. On July 24 a Cook County judge ruled that Chicago’s modest attempts at reform of two of the city-run pension plans were “unconstitutional and void.” Without serious pension and spending reform, Chicago faces a potential $1 billion budget deficit next year, largely due to the increased contributions needed to tackle its $19 billion pension hole.

A similar story is playing out in Chicago Public Schools. It also faces an upcoming $1 billion-plus budget deficit and has no plans on how to reform its nearly $10 billion pension shortfall.

Both the city and CPS credits are now rated junk. With no relief in sight, expect them to go lower soon.

But there is one key reform Chicago can make – with the support of the Illinois General Assembly – that would send a signal to the rating agencies it is serious about reform. Chicago and its sister governments should place all new workers in self-managed accounts like 401(k)s offered in the private sector.

That would immediately stop the unfunded liabilities from growing further and give city workers the retirement security they deserve, something they do not have today.

If Illinois politicians don’t act soon, the city of Chicago is going to end up where Detroit was – in bankruptcy.

Image source. 

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