In her Washington Post column Megan McArdle assesses the problems which Chicago’s next mayor must deal:
The city has been underfunding its pensions for decades, with dire results. Chicago’s pension plans collectively have only about a quarter of the assets they’ll need to pay benefits, one of the worst funding ratios in the nation. To put that hole in dollar terms, Chicago is about $28 billion short of what it needs, even under relatively favorable assumptions about future returns, or about $10,000 for every man, woman and child living in the city.
The problem could have been even worse. Mayor Rahm Emanuel, who chose not to seek a third term, has managed to halt what had been a free fall in funding levels. But while emergency action may have stabilized things, the patient is still on life support, with radical surgery still needed. Within a few years, pension contributions are projected to suck up more than 20 percent of the city’s budget. And Chicago can’t count on much help from the state, which is dealing with its own, equally severe case of pension underfunding.
From the moment the next mayor takes office in May, she will face fierce pressure. And the rest of the country will be watching, because what’s happening in Illinois is merely the earliest and most extreme manifestation of a quandary that will soon be dominating the public conversation in many states: how to pay for retirement promises to public employees without entering a fiscal death spiral.
Compared with the private sector, oversight for public-pension managers has been almost criminally lax, and the methods that many funds use to calculate their pension liabilities has been preposterously optimistic. The shoddy accounting allowed generations of politicians all over the country to curry favor with public-sector workers by offering them ever-fatter pension packages, gaining immediate benefit while deferring the political cost of paying for all those benefits until much later.
Later is now arriving. Cities and states have to figure out how to pay for all the promises made by their elected predecessors, and none of the choices are good.
Chicago isn’t a poor city like Detroit, unable to pay for its pensions (or much of anything else). It has a robust housing market, and both its per capita and median household income are within striking distance of New York City’s. Moreover, Chicago would seem to have plenty of unused taxing capacity, since the tax burden on its higher-income residents is relatively low compared with that of similar cities.
It helps to know more about the subject upon which one is commenting. Chicago has higher property taxes and sales taxes than either New York or Los Angeles. It does not have the authority to levy a city earnings tax or even if it could to levy a graduated income tax. It might levy a transaction tax on commodities trades but the commodities trading business already has one foot out the door. That would probably be the last straw. No, Chicago is completely at the mercy of the state of Illinois and the state has not shown much inclination to give the city a hand.
Basically, Chicago will continue increasing fees, sales taxes, and property taxes while cutting back on the services it provides, thereby driving people out. The first to go will be the most portable. We’ve already reached the point where those leaving are those who are most desperate.
“It helps to know more about the subject upon which one is commenting. ”
When has that ever stopped McArdle? Her posts on health care are generally pretty poor as she doesn’t know much about it. To be fair, the sis true of a lot of internet pundits.
Steve