In recent weeks, Chicago municipal bond prices have firmed up a bit. And today, wire services are reporting stories along the lines that signs of progress in pension funding have stabilized the outlook for the city’s credit ratings.
Does this mean that things are heading in the right direction? Not necessarily.
First of all, if the financial crisis of 2007-2009 taught us anything, it taught us to be careful of taking market prices at face value. Let alone credit rating agency opinions.
But let’s give the market and the rating agencies the benefit of the doubt, for a moment. What else might these recent developments imply?
What’s good for GM isn’t necessarily what’s good for America, and what is good for the Chicago Teachers Union and Chicago bondholders isn’t necessarily what is good for Chicago.
A better outlook for pension funding doesn’t appear out of nowhere. More money flowing into pensions, and supporting promises to bondholders, is coming from somewhere else.
Is this somewhere taxpayers, and people paying fees to the city of Chicago?
How durable will recent developments prove to be? Will they survive the response of taxpayers sensing a greater slice of their flesh being stripped off their bones?
This helps illustrate why we prefer a more holistic view of government finances, at Truth in Accounting. We study pensions in detail, but do not restrict our analysis to “pension funding.” We use that information to develop an overall measure of state and local government fiscal strength.
Myopic focus on pension funding and/or bond credit ratings risks prioritizing those interested parties above the interests of the Average Joe and Jane – taxpayers and citizens.
Take another peek at the disturbing chart in this article. Rapidly rising interest payments aren’t going to students looking for a way to get to school, or to communities trying to improve safety. In many ways, they are paying for sins of the past.