Reporting on a conference on saving America’s cities, Joseph Fleming of RealClearPolicy writes:
The conference concluded with remarks by San Jose mayor Chuck Reed (whose interview with Stephen Eide can be found here), after an introduction by RealClearPolitics Washington bureau chief Carl Cannon. Reed walked the audience through his push for substantial pension reform in San Jose, noting that it is difficult to reconcile the premises of giving retirees the benefits they have earned, and giving citizens the services that they deserve.
Echoing one of the conference’s recurring themes, Reed warned that unfunded liabilities will translate into one of two outcomes: service cuts, or tax increases. Unless cities and states stricken by pension woes recognize the problems addressed by the panelists, and are willing to make the necessary reforms, it appears they will soon be heading down the same path as Detroit.
Chicago’s crisis may be sooner not later—the wheel hits the road in 2015:
What matters is 2015, when Chicago’s pension chickens come home to roost.
Emanuel left that stark reality-check for the finale of his speech, where he made a spot-on pronouncement:
“Should Springfield fail to pass pension reform for Chicago soon, we will be right back here in Council early next year to start work on a the city’s 2105 budget — a budget that will either double city property taxes or eliminate the vital services people rely on.â€
The 2015 budget must cover a $1.1 billion pension bill, up $617 million from 2014. The leap is mandated by a state law designed to force the city to begin aggressively investing in its grossly under-funded police and fire retirements systems. The firefighters system, which has only 25 percent of the funds it needs, could be out of money within eight years.
Absent reforms to lower pension costs, the city will have to nearly double the city portion of the property tax bill (about 20 percent of the total bill), dramatically cut services or some combination. Emanuel wasn’t kidding when he told the Sun-Times Editorial Board that this will send Chicagoans packing: “I’m not being dramatic. I think people will flee.â€
Flight is only one possible outcome. Those unable to pay the increased taxes could lose their homes. That’s of particular concern to people living on a fixed income. If increased property taxes on rental properties are passed along in the form of increased rents, it could put people out on the streets.
Chicago is already on track to have the highest taxes of any city in the country—its retail sales tax is the highest in the country, the increase in the city’s cigarette tax already enacted will make that the highest in the country, and doubling its property tax will make that the highest in the country. Whether Chicagoans will “flee” is unknowable but seems likely. I don’t think there can be much question that having the highest taxes in the country won’t attract people to the city.
The city has a host of major fiscal problems including the pension balloon payment hanging above its head (the product of years of political malfeasance), the rising cost of healthcare, bad accounting practice, unrealistic assumptions about investment returns, and slow growth. Illinois shares a problem with Michigan: reducing its pension liability is beyond its power and, indeed, absent constitutional amendment beyond the power of the state legislature. In theory it’s possible for the city to solve some of its problems going forward. Bad accounting and unrealistic assumptions, after all, are not works of nature.
But the other problems, the problems it’s gazing into today, are beyond its power to solve.
Sorry, Dave, the comments above were meant for the foreign policy thread, and have been reposted there.
Thanks, Dave, for the aisle clean-up….
Regarding Unfunded pension liabilities: they present a troubling overhang looming over many locals, including CA draped with a rosy but superficial balanced budget veneer. These fiscal problems, though, are primarily waiting in the lobby of the average person’s awareness, and will only become apparent when the proverbial s**t begins to hit the fan.
Unfortunately, this is how it tends to be, with crisis being the motivating crowbar for reluctant change. However, in the case of cities already having a heavy tax burden to bear, doing more of the same — raising taxes — will not be the elixir taking Chicago out of their home-grown difficulties. The law of diminishing returns will kick in, and the city coffers will lose more than they gain.
What comes to mind is the image of an old building, when rendered useless, is simply blown-up making room for an entirely new structure — kind of a creative destruction logic. But how to apply that visual to such massive intrinsic problems, revolving around long term mismanagement and bureaucratic myopia, is beyond me.