And The Process Begins...

I recently wrote about at least one of the problems that state and local governments face.

The City of Chicago is showing the way: its bond rating has now been cut. Using reserves to avoid making spending cutbacks is in the eyes of Fitch, the rating agency, not good.

They are right. Unless the City of Chicago cuts spending significantly, the outlook remains negative, as property tax increases are considered, largely politically, taboo.

Given the corruption in Chicago (which manifests itself largely in overpriced contracts and significant over-staffing), getting spending under control will mean either cutting services to the bone (which undermines the nominal contract with the population of providing good services in exchange for relatively high taxes and a tolerance for corruption) or that corruption will finally have to be addressed.

Or, on the other hand, the City of Chicago can continue business as usual, going deeper and deeper into debt as the city's creditworthiness falls apart due to the structural problems cited. This seems to be the path that will be chosen: according to the article linked to above, the Chief Financial Officer of the City of Chicago, Gene Saffold, doesn't think that the down-rating will have a significant effect on long-term borrowing costs.

Oh really? Well, a change from AAA to AA won't, but given the negative outlook, coupled with the likelihood of other rating agencies also downgrading their ratings (Standard & Poor's has a AA- rating), the moment when the rating drops further will also mean significantly increasing costs for lending.

But, as usual, Chicago politicians are pretending that this won't be a problem, counting on an economic recovery to help their incomes return.

This is a naive belief at best, otherwise plainly irresponsible: the process of the long and slow bankruptcy of Chicago has begun. It won't be quite as fast as, say, Detroit, but this is the beginning of the end of great city. It's really only a question of time, as long as the Chicago Democratic Machine is in control.

Like that's going to change.