What happens when you've been kicking the fiscal can down the road for years, but the road suddenly hits a dead end? That’s what Chicago -- and the state of Illinois -- are about to find out.
Chicago's immediate problem is Tuesday's credit downgrade by Moody’s Investors Services, which turned its debt to junk and could force the city to immediately come up with $2.2 billion to satisfy debts and other obligations. It’s not clear how -- or if -- the city could come up with that money.
When big cities have had debt crises -- such as Detroit’s recent problems or New York City’s epic problems in the 1970s -- states typically rode to the rescue in one way or another. But Illinois, which has the lowest credit rating of any state in the nation, says it can’t help the stricken city.
The downgrade follows a Friday decision by the Illinois Supreme Court, which invalidated state limits on cost-of-living adjustments to state pensioners. The limits were part of a slate of reforms signed into law in 2013 by then-Gov. Pat Quinn, a Democrat, to deal with underfunded pensions. Moody’s said the court decision was key to its downgrade because the city has been hoping to dig out of its own financial hole by reducing cost-of-living adjustments, which typically raise the cost of pensions by close to 50%.
Chicago’s predicament actually has its roots in a 2003 decision by Illinois to kick the pension can down the road -- by borrowing money to fund pensions rather than trying to get the benefits reduced or to stepping up payments to make them financially sound.