Yes, the constant bailouts are disrupting a necessary mechanism for markets to function, price discovery. Subsidize the losses, privatize the profits, so why bother pricing risk appropriately (which may also include not pricing it at all because it's impossible to predict 10, 20, and 30 years into the future, see pensions).

>The difference is Chicago and Illinois can raise taxes and make appropriate cuts over the long term

Chicago, Illinois, New Jersey, federal, and most of the other governments will also be defaulting, just not by name because of course you have to prop up the bond markets. What has been happening, and will continue happening, is under investment in infrastructure, education, cuts to promised benefits (which is a default in and of itself), and inflating away a portion of it. Basically a continuous erosion of quality of life to keep the game going.