Yesterday the voters of Chicago or, at least, a few of them went to the polls and instead of electing a challenger who relied on doubletalk and handwaving in answer to the tough questions facing Chicago, re-elected an incumbent who relies on handwaving and doubletalk in answer to the tough questions facing Chicago:
Washington (CNN)Chicago Mayor Rahm Emanuel thanked voters Tuesday night for giving him a “second term and a second chance” as he declared victory over challenger Jesus “Chuy” Garcia.
Still, Emanuel, whose tough political persona is legendary, appeared humble in the wake of a fierce six-week runoff battle that served as a proxy war between the ascendant progressive wing of the Democratic party and the more traditional centrist bloc.
“I want to thank you for putting me through my paces. I will be a better mayor because of that,” Emanuel told the crowd during his victory speech.
President Barack Obama’s notoriously prickly former chief of staff also promised to do things differently in his second term.
“Chicago, I hear you,” he said. “I’m proud of what we have accomplished, but I understand the challenges that we face will require me to approach them differently.”
Emanuel was viewed skeptically by the left during the campaign. But in victory, he rattled off a list of progressive priorities, including a hike in the minimum wage, and pledged to unite the city
But he warned that “in an era of hard choices, I can’t promise that everyone will be pleased with every decision.”
It’s an era of significant financial challenges for the city, including a $20 billion pension crisis and $300 million operating budget shortfall that have resulted in multiple downgrades in the city’s bond rating. The city’s financial woes, and the reforms Emanuel undertook to try to address them, produced widespread backlash from Chicago’s teachers, working class and minority communities that ultimately drove Emanuel to a runoff in February.
How bad is Chicago’s fiscal situation? This bad:
In a friend of the court brief filed in the state pension case, Corporation Counsel Stephen Patton warned that Chicago faces a $300 million deficit in 2016 with shortfalls continuing “for the foreseeable futureâ€â€” even before piling on the pension liabilities that have dropped the city’s bond rating to just two levels above junk status.
And if state legislation that saved two of four city employee pension funds is overturned, Patton warned that a “catastrophic outcome†awaits retirees and taxpayers alike.
“The city’s liabilities will increase by $2.5 million a day. The city will suffer further downgrades that could materially increase the cost of borrowing money essential to funding basic operations. And it could make the city immediately liable to pay hundreds of millions of dollars as a result of default and early termination of debt-related obligations,†Patton wrote.
To place that in some context Chicago’s total annual revenues from all sources are around $2.1 billion. The city already has the highest sales tax in the country and it’s bumping up against the limit at which it can set property taxes without turning to the voters for approval. The mayor has already relied heavily on increasing city fees to balance the budget. Pushback against that was one of the reasons Emanuel faced such strong opposition.
Either Chicago needs to increase its revenue by 50% this year and every year thereafter or it needs to borrow an extra $1 billion this year and every year thereafter or some combination. Chuy Garcia had the right idea:
“Yes, we have a debt crisis and a pension crisis. But that’s because of the one thing: We have a growth crisis,†he said, noting Chicago’s decline in population, which fell 6.9 percent to 2.7 million from 2000 to 2010. “We can’t tax our way out of this crisis. We can’t keep borrowing our way out of this crisis.â€
Some investors in the $3.5 trillion municipal market now treat Chicago’s debt as speculative grade. The burden weighing down the city totals $32.6 billion when liabilities of its park district, water agency and school board are included.
It’s hard to see how to reconcile that with the policies Rahm Emanuel must adopt and with the Big Business, zero sum orientation he has displayed so far.
I see no way the city can solve its fiscal problems without relief from the state legislature, something they have shown little inclination to grant, signed into law by Gov. Rauner, something there’s no guarantee he will do, or with the governor’s veto overridden by the legislature, something it seems impossible to believe.
That’s the problem that Mayor Emanuel was re-elected to solve. He didn’t even mention the balloon payment Chicago is required to put into its public employees’ pension fund in his State of the City message early this year.
You might be interested:
Shockingly Bad Fiscal Health of Chicago (and the Financial Engineering Chicago Uses to Hide that Fact)
If I had more time and inclination, I would dig into the wonderful world of bonds. Culpepper seems to be the perfect entry point.
Yes, that’s a great piece, TB. Thank you for bringing it to my attention. It’s sufficiently good and important I may even turn it and this comment into a post. A couple of points.
1. Mish lives in the Chicago suburbs. He has a stake in Chicago’s problems.
2. Complex fund accounting of the kind that Ms. Culpepper outlines is typical of city, state, and the federal governments.
3. I may be naive on this but it seems to me that repeated refinancing of capitalized interest by an entity without substantial prospects for increasing revenues is a sign that the end is near.
4. I really wonder about the implications of Mish’s prescriptions at the national level. Can they be adopted without the economy collapsing? In other words they might precipitate what they’re trying to avoid.
I really wish I had more time. I am supposed to be looking up Access syntax, but because I do not really like it, I am easily distracted.
Mish is anti-Keynesian, and you would need to toss many of your beliefs onto the trash heap to buy into his proposals. I am more open to them, but I am mostly in the Austrian camp. In some of the places he disagrees with them, I agree with him, but he is more libertarian. I am a libertarian in philosophical spirit only.
Access! Forsooth.
I’ve been reading Mish’s stuff for years. I think he’s a smart enough guy but my impression is that he’s a radical. He takes a “the worse the better” view.
I’m more of a gradualist. I think that in revolutions the least scrupulous benefit overwhelmingly.
I got roped into it, and I have to keep it dumbed down. I usually get frustrated and use the Windows API, but it will eventually come back full of macros. The engineers love Access, but when they have created a mess, I get called in to fix it. I can design rock solid architecture, but I have never learned all the tricks to get Access to do what I want it to do – hence, the API calls.
I have tried to get them off of it, but the ruling from the top is to back off. Since I like to eat, I keep my mouth shut. I am trying a few new designs to keep them out of the back-end, but trying to do anything in Access is a pain in the ass.
This is a narrow point but yes, capitalizing the interest is a sign of inability to service the debt. Not really financial engineering, but out and out irresponsible credit. The stuff only greedy bankers do…….oh, wait.
In project finance, as noted, it’s done because the project is not done and cash flowing, but they want the funding to be characterized for tax purposes as debt (a coupon and maturity date) as opposed to preferred or common equity. That’s financial engineering.
But for IL it’s dead proof positive they can’t service the debt. They have cash flow; can’t service the debt. A bank, for example, would have to establish loss reserves for a non-principal paying troubled credit at “x” rate. However, when you can’t even pay interest the reserves go way, way up. Of course IL is a gov,ernment entity, so they are “special.”