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The Week in Public Finance: Junk in Chicago, April Surprises and Diversity Rocks

A roundup of money (and other) news governments can use.

For past editions of The Week in Public Finance column, click here.

Junk city?

Moody’s Investor’s Service downgraded Chicago’s bond rating this week, a move that triggered potentially more problems for the financially besieged city and cut the city’s credit down to junk status. Detroit, which exited from Chapter 9 bankruptcy last year, is the only other city larger than 500,000 people with a non-investment grade credit rating. Chicago’s downgrade to junk status came on May 12 and affects $8.1 billion of outstanding general obligation debt, $542 million of outstanding sales tax revenue debt and $268 million of motor fuel tax revenue debt. The downgrade means it will be much harder for Chicago to refinance its debt.

Moody’s cited last week’s Illinois Supreme Court ruling that overturned the state’s proposed pension reforms in its downgrade, noting that Chicago’s hopes to fix its budget by enacting similar changes have now “narrowed considerably.” Whether or not Chicago's pension reforms stand, the agency said, “we expect the costs of servicing Chicago's unfunded liabilities will grow, placing significant strain on the city's financial operations absent commensurate growth in revenue and/or reductions in other expenditures. The magnitude of the budget adjustments... required... are significant.” Moody’s also noted that Chicago's tax base is highly leveraged by the city's debt and unfunded pension obligations. The agency, hinting that the city should push for a tax increase, counted Chicago’s “broad legal authority to tap into its large and diverse tax base for increased revenue” among its attributes.

Or not junk city?

Moody’s downgrade also meant that for a few days this week, Chicago’s credit ratings ranged from A+ (which is upper-medium grade and its rating from Standard & Poor’s) to the Moody’s Ba1, the first ratings grade that steps into junk territory. There are five entire ratings levels between those two grades, a spread that led one former credit rating analyst to wonder on Twitter whether there is a "deep flaw" in the ratings process.

On May 16 S&P lowered its Chicago rating to A-, which is still in the upper-medium grade of ratings but just barely. S&P, which places a high value on city leadership, cited the city’s increased financial pressure as reason for the downgrade. But it also noted that Chicago has a diverse tax base and a management team with responsible fiscal policies in place. These are an important foundation for any city that needs to address the challenges that this city is facing,” S&P said. So that means there are now three other ratings levels between Chicago’s top rating and bottom rating. Also on Friday, Fitch Ratings lowered its Chicago rating to BBB+, which falls directly in-between the other two agency ratings.

Hitting targets

On to some positive news. We don’t even have to leave Illinois. The National Association of State Budget Officers reported this week that most states had a flush April for tax collections this year, a development that will likely help states meet their tax collection targets for the 2015 fiscal year. Even Illinois’ revenues are now expected to be at least $300 million higher than previously forecasted, NASBO’s Brian Sigritz wrote, “allowing the state to reverse some social services spending cuts.” The April surprise is widespread, affecting states like California, Arizona, Missouri, Pennsylvania, West Virginia and New Jersey.

Still, Sigritz, warned, “most of the gains are due to an increase in income tax collections, partly from the strong stock market performance in calendar year 2014, and are viewed as one-time occurrences.”

Growth in other less volatile revenue sources, like sales taxes, remains sluggish and some states are still missing their projections. The boost is nice but it still won’t solve the budget difficulties some states are having related to the drop in oil prices or long-term liabilities. Most states’ recommended budgets for next year project only modest revenue growth, accompanied by moderate increases in state spending, Sigritz said. But even posting modest modest revenue growth is going to be a challenge for some states. In New Jersey, for example, Gov. Chris Christie vetoed a bill Monday that would have required New Jersey to put the majority of its $225 million from a pollution settlement with Exxon Mobil Corp. toward environmental cleanups. The governor plans to use three-quarters of the settlement money to balance the 2016 budget.

Celebrate diversity

This week, WalletHub once again examined the demographic profiles of the 230 most populated U.S. cities and ranked them by diversity. The social media company with a personal finance focus didn’t just look at the usual economic class, ethno-racial and linguistic diversity. It also incorporated the diversity of cities' households (type of household, age of occupants, etc.) and economies into its final rankings. (For more on the company’s methodology, click here.) Not surprisingly, California cities dominate the Top 10 list. But a few surprises sneak in. Aurora, Colo., ranks 13th, largely for its diverse economy. And while San Jose, Calif., has high scores in ethnic and class diversity, its mediocre rankings in household and economic diversity pull it down to the 22 spot.


Most Diverse Cities


Least Diverse Cities 








Los Angeles, CA



Knoxville, TN



Long Beach, CA



Flint, MI



San Diego, CA



Cincinnati, OH



Anaheim, CA



Detroit, MI



Sacramento, CA



Fargo, ND



Renton, WA



Provo, UT



Houston, TX



Pittsburgh, PA



Kent, WA



Columbia, MO



Bakersfield, CA



Springfield, MO



Federal Way, WA



Erie, PA


Liz Farmer is a former GOVERNING fiscal policy writer.
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