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September 18, 2013

More Bad News for Chicago

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Friday the 13th brought more bad news for Mayor Rahm Emanuel and Chicago. Standard and Poor’s (S&P) revised the city’s bond outlook from stable to negative. Negative is… well… bad. But certainly this wasn’t a surprise. After all, Moody’s took even stronger action and actually downgraded the city’s bond rating in July. And it’s well known that the city has a couple of huge pension payment tabs coming due soon.

For anyone who isn’t following this troubling situation, here are the stark facts:

Chicago citizens are on the hook for $19.4 billion for the city’s four retirement plans.

Bad enough, this unfunded liability has grown by 63 percent in just three years!

In fact, the plans are only 35 percent funded. This is vastly under the 80 percent considered “healthy” by industry standards, including S&P’s.

That the city of Chicago would promise billions in benefits to its firefighters, police, teachers, sewer workers and bureaucrats but then only fund these promises by 35 cents on the dollar is unconscionable. Yet that’s exactly what city leaders have done through the years. With the full cooperation of the labor unions, too!

But, according to S&P, the news is not all bad. Chicago enjoys a vibrant and diverse economy and enjoys “status as a major regional economic center”. They have “strong management conditions with good financial policies and practices in place.” The city also has strong cash reserves so it can cover debt payments and expenses. For a while…

As S&P points out that the city is very weak in the budget department, noting its recent deficits. Plus, they’ve been relying on those reserves to balance the budget and deal with other challenges.
Of course Chicago is not alone. Detroit’s recent bankruptcy filing was brought on by similar massive pension and retirement health benefit excesses. And closer to home, the state of Illinois is even worse shape considering the $100 billion owed for their own pension mess, one of the very worst in the nation!

But under state law, Chicago has to make a massive payment in 2015 to police and firefighters’ retirement funds under state law, reportedly topping $1 billion, more than double the $483 million due in 2014. This is to make up for years of chronic underfunding. And those massive payments are only supposed to increase in coming years as pension costs keep mounting.
And according to a new report by the Illinois Policy Institute, total debt in Chicago is closer to $63 billion when you figure in a more realistic assessment of pension debt plus all the city’s other obligations. So every citizen in Chicago is on the hook for $32,000.

Chicago is now wrestling with operating deficits and has cut spending; school districts are closing schools to eliminate their own shortfall. S&P gives Chicago high ratings because they enjoy “home rule” status, meaning they can raise taxes and borrowing. But S&P seems to treat tax hikes as just a simple bookkeeping entry, noting “the city’s reluctance to raise taxes.” They do not mention how higher taxes might hurt Chicago business, jobs and of course taxpayers.

Emanuel knows that Chicago must be competitive. Indiana and Wisconsin both are actively out to attract businesses out of Illinois and what better place to start.

So, what’s a Mayor to do? The state of Illinois holds the strings over how its cities and municipalities can restructure their pension plans. Indeed, Emanuel looked to Springfield for some relief to solve Chicago’s massive pension problem. But rather than progress, the state house and governor simply ended their session in squabbles and non-action.

Springfield needs to give Chicago some flexibility and freedom to redesign their pension systems and the labor unions need to come to the table ready and willing to work. They are a far, far cry from Detroit. But unless action is taken soon, many Chicagoans will be hurt.

As a frustrated Emanuel noted to city employees, “If we follow along the current path, we know we will confront two stark choices: Either the city’s pension payments will squeeze its ability to offer the essential services that you provide, or each of our pension funds will go bankrupt, leaving you and your families without retirement security.”

- Alison Acosta Fraser is a Senior Fellow and Director of Government Finance Programs at The Heritage Foundation.

Originally appeared in the Illinois Review.

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