It Just Has To

I want to commend Elizabeth Bauer’s excellent article at Forbes on Chicago’s pension crisis to your attention. It is hard to excerpt but here’s a characteristic snippet:

So, again, to repeat: when we speak of the importance of pension funding, most of the time, it can be fairly abstract and hypothetical. It’s unfair to future generations to ask them to pay what amount to basic payroll costs. There’s a risk that a plan that relies on future tax base growth could fall apart because, let’s face it, by the time you can predict that a city or state’s population is declining rather than growing, it’s too late. And giving legislators the ability to defer funding places us at risk of them succumbing to a temptation they simply shouldn’t have. (Yes, I’ve hashed this all out before.)

But this is no longer hypothetical. It’s no longer about good governance principles. It’s about impending insolvency if the city backs out of its funding schedule.

How soon is “impending”? Eight years at the longest. Possibly as soon as 2025.

Meanwhile, the editors of the Chicago Tribune declaim about the official response to the crisis:

We’re grateful to hear an elected official confront the details of the pension crisis and commit to solving it, regardless of the potential political cost. So far the responses from Springfield have been empty. A lot of: We look forward to hearing what the mayor has to say. …

Where’s the urgency?

One aspect of the problem missing from both discussions is that Chicago’s population is declining. That means that the number of Chicagoans who must pay for the misfeasance of past administrations is a million people fewer than would have been the case 40 years ago while the number of public employees who’ve retired and collect pensions continues to increase.

The state and the city depend very heavily on revenue from taxing marijuana and an as yet imaginary Chicago casino to fill the gap. They have no studies to support their assumptions about revenue. It just has to work.

That’s a disease afflicting a lot of our public policy. The preferred solution just has to work because the alternatives are too awful to contemplate. It can be seen at the federal level in personal income tax policy and in our policies with respect to Afghanistan and Syria.

As it works out there have been studies of the effects of legalized casino gambling on local economies and they tend not to be benign. Most of the spending in such establishments is from local people and they operate like a highly regressive tax.

It should be obvious that there are serious limits to how much tax can be extracted by taxing marijuana. We already have a huge black market which we’ve been unable to eradicate. If the taxes are high enough that will continue to be the case. My understanding is that revenues have fallen short of policymakers’ expectations in every jurisdiction in which recreational marijuana has been legalized.

Gov. Pritzker’s spending plans depend heavily on the proceeds of a yet-to-be-approved amendment to the state’s constitution allowing a graduated income tax. To the best of my knowledge no study has ever been done of the likely results of such a tax but its effects are already being felt—rich people are leaving Illinois in numbers.

There are really only a handful of ways to address the city’s and state’s fiscal problems. Most of the focus has been on raising taxes but that, as noted above, is already having adverse effects on our economies.

We can amend the state’s constitution to allow legislators to reduce future pension outlays. We can cut the pay of present public employees. We can reduce other spending—most of that is either Medicaid or road repair and the state’s roads are already in wretch shape as anyone who has driven from Illinois to Wisconsin, Indiana, Iowa, or Missouri can attest.

Or we can grow while limiting public spending to what we can afford. We are presently doing the opposite.

6 comments… add one
  • TarsTarkas Link

    If Lightfoot, Pritzker and the Madigans are hoping that a Democratic President will bail them out in 2021 they’re going to be disappointed. No way a President Warren, Harris, Buttigieg, etc. does so. After all, why should Illinois be rewarded for doing its job?

  • More than that both parties have gotten very accustomed to treating Illinois as a cash cow over the period of the last 75 years. If they address Illinois’s fiscal bungling, they’ll need to address those of the other half dozen states that are on the verge of fiscal disaster. Two of them, New York and California, are so large that bailing them out would be a strain even for the federal government and they’re a lot more important to the Democrats than Illinois is.

  • Guarneri Link

    I think both of those comments are probably correct. The dynamic would have been a little different with a President HRC, from New York, uh, I mean Park Ridge…….

  • Grey Shambler Link

    Hang on. Negative interest rates on the way. The more you owe, the more you make.

  • bob sykes Link

    “We can…, we can…, we can…”

    The reality is you can’t do a single one of those things. Nothing will happen until bankruptcy actually occurs. Then some jerry-built paste up will be used to past over the worst.

  • It depends on the meaning of the word “can”. What I mean is that they are hypothetical solutions. I realize they are politically impossible. Actual events eventually overwhelm political considerations. You’re probably right that the solution that is eventually arrived at will be worse than might have been if politicians had been willing to face realities in anticipation rather than when they struck.

    There will come a point at which the city and state will no longer be able to borrow. There will come a point at which imposing new taxes or increasing the rates of taxes will no longer increase revenues. Hard decisions will be made and they’ll probably be made badly.

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