Chicago’s Public Pension Problem

Although The Economist does take note of Chicago’s public pension problems:

The woes of the city and the state of Illinois – which has its own, worst-in-the-nation, $100bn unfunded pension liability – have been driven primarily by the government’s failure to pay its share to keep its pension promises.

But this month, after years of inaction, Illinois passed a bill to tackle its unfunded pension liability. The state hopes the new law will save $160bn over the next 30 years – savings that will come from cuts in retirement benefits for state workers and forcing the state to make its pension contributions. The law has won plaudits as a first step towards fiscal reform. But it comes only after repeated downgrades that have left Illinois with the lowest credit rating of any US state.

Now it is up to Mr Emanuel, the hard-nosed former Obama administration official, to do the same for Chicago. Any proposal to solve the city’s pension problem is bound to look much like the state deal – cutting benefits for public workers and raising contributions.

its analysis doesn’t adequately characterize how serious Chicago’s problem is.

Chicago has two problems, an immediate problem and a long term problem. Chicago’s immediate problem is the $1 billion payment into its public pension fund required by new state regulations. There’s no obvious way for Chicago to raise that kind of revenue. The city already has the highest sales tax in the nation. There are limits to how fast the city can raise property taxes. The city does not have the power to levy a tax on income.

In recent years most of the city’s incremental revenue has come as a result of increasing fees. There’s only so much that can be realized that way—nothing like the $1 billion the city must come up with.

Paying the pensions of its retired public employees is the long term problem. The whopping pay increase given to Chicago teachers last year will aggravate that problem.

Predictably, Mayor Emanuel’s prescription for fixing the immediate problem is for the state to ease its requirements. That doesn’t actually accomplish anything other than kicking the can down the road.

The Economist’s prescription, following the lead of the state of Illinois, has a small problem. I don’t think that Illinois’s or Chicago’s attempts at weaseling out of their pension commitments will pass court muster. That depends entirely on how much water the state’s judges (who, amusingly, were exempted from the state’s recent pension reform law) are willing to carry for the state’s pols. They’d need to be willing to ignore both the language of the state’s constitution and precedent. I don’t believe they’re that willing.

As I see it there are two possible remedies for Chicago’s public pension problems. Illinois is already 50th among the states in its contribution to education (despite constitutional language about the state having the primary responsibility for education, language that has been found to be advisory only). The state could start kicking more money Chicago’s way.

Or Chicago could follow Detroit’s lead and declare bankruptcy.

7 comments… add one

  • ...

    Now it is up to Mr Emanuel, the hard-nosed former Obama administration official….

    Is Rahm hard-nosed at anything other than political games designed to win elections or polling contests?

  • I don’t think he’s hard-nosed. I think he’s just coarse and mental.

    My view is that he thought that mayor of Chicago was yet another sinecure in a long line of sinecures that he could run as a technocrat. It would be another step on his ladder. I think he was wrong.

  • PD Shaw

    Unclear to me whether Chicago can file bankruptcy. Federal law requires specific state authorization for a municipality to file bankruptcy, and the only statutory reference I’ve seen cited applies when a city of under 25k petitions the governor for some form of outside receivership, which can recommend bankruptcy.

    It seems like the English papers don’t understand that in America, there are two sovereigns, the states and the fed, and local government is really just a regulated enterprise of both.

  • Jimbino

    I left Chicago back in 1958 when the public schools went all to hell (the first time). That move, to Elmhurst, improved my education and my life immeasurably. I wish I could leave Chicago again!

  • It seems like the English papers don’t understand that in America, there are two sovereigns, the states and the fed, and local government is really just a regulated enterprise of both.

    It’s not just the English. Most European commenters don’t understand American federalism, either.

    They don’t understand that our governments aren’t in a strict hierarchy with counties as subdepartments of states and states as departments of the federal government.

  • A quick Google search indicated that the estimated value of all Chicago real estate was $550 billion at the end of 2009 (http://tinyurl.com/mz75m64). I don’t know how precise this number might be, but it seems likely it’s in the ballpark. Assuming it’s accurate, then the $1 billion payment facing the city is a pittance compared to the wealth residing in the city. I’ll take it as a political reality that property taxes couldn’t be raised quickly enough to cover the payment but it would seem possible to impose an increase which could in short order service and retire debt on a new bond issue to fund the payment.

    Chicago may have a revenue and governance issue but it surely does not have a wealth issue. In addition to solving its fiscal problems, a healthy increase in the property tax might do wonders for focusing voters attention on the governance issues.

  • Chicago may have a revenue and governance issue but it surely does not have a wealth issue. In addition to solving its fiscal problems, a healthy increase in the property tax might do wonders for focusing voters attention on the governance issues.

    The city does not have the power to tax wealth (the state does). The city also does not have the power to raise property taxes except within the limits specified by the state. IIRC to do so would require a referendum.

    There’s also a difference between raising tax rates and increasing revenues.

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