Moody’s has cut Chicago’s credit rating by two notches to junk status. The editors of the Chicago Tribune remark:
That means Chicagoans likely must pay much higher interest to borrow money for the city’s many needs. And the spreading awareness that Illinois governments can’t control their pension crises casts new suspicion on the creditworthiness of cities, suburbs, towns and school districts statewide — that is, on many of the 7,000 local governments here in what we’ve called The Government State.
Chicago’s corporate counsel has said that he doesn’t think that the Illinois Supreme Court’s decision will have any effect on Chicago’s plan to deal with its public employee pension problems. If I can find the link I’ll post it. I’m skeptical. Just because he’s a lawyer it doesn’t mean he’s a good one.
In the interests of thinking positive, here’s my plan for digging Chicago out of the hole it’s dug for itself. Remember: it’s an imperfect world and the best we can hope for at this late stage in the game is a plan in which the pain is shared.
- Get a reprieve from the state on bringing our pension fund up to snuff. This is a sine qua non. It doesn’t solve anything but it does provide some head room.
- Eliminate any new city hiring that has been scheduled and any new city projects that don’t have a pay-off in reduced operating costs by the end of 2017.
- Increase taxes. I think that some small tax increases are inescapable. My first step would be a small increase in the residential property tax and a change in the property tax multiplier so that Loop properties are taxed a little higher than they are now. I think that an increase in the sales tax should be avoided.
- Cut the wages of city employees. I realize that this is the Third Rail but I don’t see how it can be avoided, either. If there are to be shared sacrifices, city employees need to put something on the table, too. It would also have the benefit of reducing future liabilities.
- Reduce police overtime where possible and tighten the rules on how firefighters spend their off-duty time.
- Most importantly, more economic growth. For this to be anything than an Underpants Gnome proposal, the federal government needs to take some affirmative steps to spur economic growth.
- Reduction in city services. These should be avoided if possible.
I’m open to other suggestions. The mayor’s proposal is to pay down the principle on our debt which strikes me as an Underpants Gnome proposal. Keep in mind that increasing the sales tax just drives retail out of the city, that the city doesn’t have the power to impose an income tax, and that higher taxes and fees for businesses will reduce economic activity. So will a higher property tax but we’ve got to do something.
There’s one final point I’d like to make on this. For Chicago to overcome its problems, it’s going to need to become a very different city from the one it’s been for the last 60 years. Business as usual won’t solve anything.
Update
It may be that some readers don’t recognize how serious this downgrade is for Chicago. The downgrade triggers about $2.2 billion in additional payments to banks. To place that in perspective, Chicago’s total corporate fund budget for 2015, most of the city’s project spending, is $3.5 billion. This is a big deal.
One of my proposals for the original federal stimulus package was some sort of federal bail-out of state and local pensions conditioned on steps to transition to a defined contribution plan. While the federal government was looking for ways to get states and local governments to spend more, the long term drag on the economy was predictable. The political problems are that such a switch would aggravate government employees at the base of the Democratic Party and aggravate low-spending/service Red states. I’ve been told the federal government has largely switched to defined contribution plans, but the feds can afford the transition.
I largely agree with that but would impose two caveats. First, no adjustments have been made to the changes in revenues and anticipated revenues that have occurred over the last seven years. Just as few predicted the recession or, at least, its timing few predicted the shallowness of the recovery.
Second, very little has been done over the period of the last seven years to remediate the effects of the recession. I’ve made my views clear: I think that all of the money appropriated in 2009 should have been spent in 2009. The only practical way to do that was via the tax system and the way with the greatest impact would have been via a payroll tax holiday for both the employee and employer sides.
1 is a given. 2 should be modified to eliminate the payback standard. When they tell you it’s an essential project tell them they have prevailed upon you……so show me the non-essential offset to take its place. Else they will all be essential. 3-5 need to be in the mix and Rahm just laid the groundwork, claiming that the irresponsible rating agencies are forcing a tax increase. 6 won’t happen and 7 will just be an exercise in dabbling.
Quite frankly the numbers are too staggering and the constituencies too intransigent for a solution in my opinion. Just enough will be cobbled together to limp on for long enough for alternate plans to be made by those who can. Expect tee times to become more dear on SW side golf courses. Expect more residential exodus and more divergence in quality of neighborhoods. Is a commuter tax legal?
Let’s start a pool. After Rahm leaves for Hillary-ville to “best use my talents to serve the people” who’s the next mayor? I pity the fool.