Wednesday, July 31, 2013

Chilly fiscal wind blows into Chicago after Detroit failure

Crime scene: The cost of fighting crime has added to Chicago's financial stress.

Crime scene: The cost of fighting crime has added to Chicago's financial stress. Photo: Getty

Detroit's bankruptcy filing is bringing added scrutiny to the finances of Chicago, as the Illinois city's struggle to contain its murder rate and swelling pension costs leave it with the lowest credit grade in 26 years.

Moody's Investors Service dropped Chicago's rating three levels on July 17.

A fall of that size is unprecedented for a US city as populous as Chicago, according to Moody's.

Detroit, 450 kilometres to the east, filed the nation's biggest municipal bankruptcy the next day, as $US18 billion ($19.8 billion) of debt compromised its ability to protect its citizens.


The credit rating of Chicago, the third-biggest US city, is A3, four steps above junk and its lowest since 1987.

Detroit ''should be a real warning sign and a great opportunity to get the political will behind them to really make some meaningful changes'' in Chicago, said Paul Mansour, head of municipal research at Conning, which oversees about $US9 billion of local debt.

Among the 20 largest US cities, Chicago trailed only Detroit in the rate of population decline from 2000 to 2010. The number of Chicago residents sank 6.9 per cent in the decade, to 2.7 million.

The cost of fighting crime has added to Chicago's financial stress. The city recorded 506 homicides in 2012. The city cut its homicide rate by 29 per cent in the first half of 2013, partly by paying 400 officers overtime to police crime-ridden neighbourhoods.

Chicago's Democratic mayor, Rahm Emanuel, told the Chicago Sun-Times in a July 20 article that Detroit's bankruptcy ''should be a wake-up call for all of those who try to put their head in the sand and say that we don't have a problem with employee pensions''.

He drew contrasts with Detroit.

''Our economy is diverse, which is our strength,'' Mr Emanuel said in the article. ''We're not tied to the auto industry.''

Mr Mansour said the difference between Detroit and Chicago was Chicago had more time to solve the problem. ''But every year it's getting worse and worse.''

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