Budgetary pressures and low investor confidence are forcing Chicago’s public school system to borrow money at ruinous interest rates just to stay afloat. Reuters reports:
The Chicago Board of Education managed to sell only $725 million of an originally planned $795.5 million of tax-exempt bonds, and yields on the deal topped out at 8.5 percent, a massive premium relative to higher-rated debt sold in the U.S. municipal bond market and a clear indication of investors’ view of the depths of the district’s fiscal woes [. . .]
“It’s a Puerto-Rico grade yield and clearly signals that the district is on an unsustainable path,” said Matt Fabian, a partner at Municipal Market Analytics.
That the third largest city in the United States (until relatively recently considered a well-governed municipality with a promising future) is seen as this kind of risk by the credit markets should drive the message home that America’s bluest cities and states aren’t on a sustainable path.
And as the fiscal vise tightens around these governments, various political conflicts will come to the fore.The first is internal: Public sector unions, which jealously protect their generous pension guarantees, will be pitted against the overwhelmingly Democratic constituencies that disproportionately suffer from underfunded public services (like Chicago’s failing public schools).
The second is external: If blue cities around the country remain unable to provide necessary services at sustainable cost levels, they will inevitably start clamoring for federal assistance.
Some of that help will have to be given—but only in exchange for profound institutional reforms.
The ongoing blue model collapse is one of the most underreported, and politically consequential, stories of our time.
How it will be resolved—and the contours of the political and fiscal system that will emerge in its wake—remain an open, and crucial, issue.
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