State of Denial

The editors of the Wall Street Journal are skeptical about Chicago’s plan to lower its cost of borrowing by issuing bonds tied to sales tax revenue:

As part of Illinois’s slow-rolling bailout of Chicago, Democrats in Springfield this summer allowed the city to issue bonds securitized with $700 million or so in annual sales tax revenue. Creditors would have a legal lien on the revenues. Chicago plans to start floating the sales-tax bonds next month to refinance existing debt.

The bonds will be cheaper to finance than Chicago’s junk-rated GO bonds, which carry a 3.5% premium over top-rated municipal securities. Fitch has rated Chicago’s sales tax bonds AAA, which is an insult to every triple-A issuer including the U.S. Treasury. (Fitch still rates Treasurys triple-A, unlike Standard & Poor’s.) While the city noted in a recent presentation that “ratings agencies rate bonds issued by special-purpose corporations highly because they are more legally secure than a normal bond,” that hasn’t historically been the case.

Let the buyer beware. Chicago’s population peaked in 1950 and as of the last federal census it had already declined from peak by a million people, about 30%. The Census Bureau seems to think that Chicago’s population is remaining steady but I think they’re in for a surprise. I think that the extent of Chicago’s decline will be much clearer in the 2020 federal census.

Chicago’s sales tax is already the highest of any large city in the country. Sales tax revenues have nowhere to go but down.

The State of Illinois, colloquially referred to here as “Springfield”, needs to come to terms with Chicago’s problems. Stripping the city of future access to its sales tax revenues is no solution. The real solution is amending the state constitution so the city can dig itself out of the hole that years of political savvy but policy incompetence have dug for it. That would be politically painful so it’s unlikely to happen.