Chicago, Illinois was recently selected as Time Out's best city in the world based on its City Life Index. The City Life Index scores places on categories such as food, drink, culture, friendliness, affordability, safety and happiness.
While it may look like I am picking on Chicago I am not. I am simply using them as one example of how governmental units are sustaining their "lifestyle" with their credit cards. All is joy and happiness until all the cards are maxed out and you cannot get another.
Let's look under the hood and see how they do that.
Approximately 25% of Chicago's budget goes to "service" debt. If they are like many municipalities, they don't pay-down their debt. They roll them over by issuing new debt. A rise in interest rates results in accelerating debt payments as bonds mature and are rolled over at the new, higher rates.
While higher interest rates are advantageous for pension funds in the long term they are devastating to asset values in the short term. Interest rates and the asset value of the underlying bond move in opposite directions.
But wait, the Feds and the State of Illinios will come to the rescue...
They already have.
That does not include money from the State of Illinois from the Fuel Tax which is apportioned based on population rather than miles of road or miles driven. Chicago gets 22% of Illinois Fuel Tax that is collected while it only has 1.3% of the miles of road. They must have really fantastic roads in Chicago, I am guessing.
The Feds might have issues as well
|Mandatory vs Discretionary spending. Mandatory is ocher colored (red) while Discretionary is aqua (blue-green)|
Much of what makes Chicago a cool and fun city is fueled by debt. Debt decouples spending from underlying economics and creates an illusion of boundless possibilities. The difference between a household and a city is that residents and businesses can flee the city. They can also flee the state if the city has enough political power to force the state to subsidize the city.
This is likely to be the fate of many cities.