Pension obligations have become the bane of the existence of municipalities around the country and no where is this more true than Chicago. In fact, Vice President and Senior Analyst for Moody’s Rating Service called Chicago “an outlier among U.S. municipalities” because of the sheer magnitude of Chicago’s unfunded liability, both nominally and as a percentage of operating revenues.
The city’s pension fund is in danger of becoming insolvent in the next one or two decades. In last year’s budget, the pension funds paid out $1.7 billion in benefits to retirees, compared with only $440 million put in by the city. Last week, Chicago Mayor Rahm Emanuel made an attempt to do what he accuses the Illinois legislature of doing on the State’s pension crisis for too long – trying to buy more time. According to a state law approved while Richard M. Daley was mayor, the city is required to put in nearly $600 million more in contributions to police and fire pensions starting in 2015. That additional amount is about one-fifth of the city’s day-to-day operating budget.
The mayor indicated he’s going to try to push the day of reckoning into the future. The measure being put forth by Emanuel’s chief Springfield ally Senate President John Cullerton D-Chicago, would require a series of small city property tax increases starting in 2018 – three years into what would be Emanuel’s second term as mayor. It would also delay the need for big increases in city pension payments to 2022. The warning signs have been flashing red on this issue for some time. Standard & Poor’s Rating Services issued a negative outlook on Chicago’s general obligation bonds nearly two weeks ago. That followed Moody’s Investors Service’s decision to drop the city’s general obligation bond rating three notches in July. The Moody’s move came a month after Fitch Ratings put the city’s rating on review for a potential downgrade. All three ratings services cited the city’s bleak pension outlook.
An analysis of the characteristics of the cities with the highest pension liabilities – cities like Jacksonville, Fla., Los Angeles, Dallas, Houston, and Phoenix – shows a troubling trend – all of these cities have experienced large declines in population which have resulted in declining tax revenues. In prosperous municipalities with growing tax bases such as Washington DC (where pension is only 11 percent of annual revenue) and Wake County, North Carolina (where pension liabilities add up to only 15 percent of annual revenue), the pension costs are easily managed. Strong investment gains can also relieve the fiscal pressure.
None of this bodes well for Chicago residents. Chicago has experienced a steady decline in population over the last decade. Some of Chicago’s most challenged communities like Austin and North Lawndale on the city’s West Side and Back of the Yards and Roseland on the city’s South Side have lost tens of thousands of residents. The abandoned homes – many emblazoned with the ominous red “X” are a testament to the mass exodus. Without targeted economic development in these areas, and without social service infrastructure to support struggling families there is little expectation that the city’s tax base can be shored up substantially enough to generate much-needed revenue.
A second critical factor is that pensioners are typically public sector, middle class employees and many reside in the city’s African American, Latino and white ethnic enclaves. The livelihoods of families in those middle-class communities are at stake. Indeed, the pension crisis will put even more pressure on these families who have already experienced severe cuts in services, increases in fines, fees and overall cost of living in recent years. This lethal combination could push even more of the tax base out of the city, thinning out the middle class and further damaging the public sector.
Compounding the issue is the fact that the Emanuel administration has done very little to engender good faith with public sector unions over the last year. In addition to the fiery showdown against the Chicago Teachers Union, run-ins against SEIU, and now the tense stand-off with the Police and Fire unions, it’s clear that coming to a decision will be difficult.
The Police Union alone is 30 percent underfunded and Fraternal Order of Police President Mike Shields fought against the city’s proposed deal which would have required sergeants to pay more toward their retirement, raised the retirement age, lowered cost-of-living increases and required retired sergeants to pay part of their health care costs. Those negotiations have been on ice since early this summer.
Photo courtesy of http://www.governing.com
One thing is certain: the can has been kicked about as far down the road as it will go. A delay will not solve the problem of the city’s unfunded pension liability. In fact, it may worsen the health of the pension plan and put it on a faster track to depletion of assets. Mayor Emanuel sites Louisville, KY as a possible model for pension reform. However, he may be better suited to examine the pension negotiation process implemented by Atlanta Mayor Kasim Reed.
Reed guided Atlanta’s City Council to a unanimous landmark agreement on sweeping pension reform only a year after taking office. The plan overhauled the the pension plan for new hires as well as existing employees, shifting to a defined-contribution plan and increasing workers’ contributions by 5 percent across the board. The overhaul – along with other fiscal reforms the mayor has achieved – puts the city on its soundest fiscal footing in a generation. The key? Collaboration and determination to tackle pension reform so his successors won’t have to. First, Mayor Reed is known for his pragmatic, bi-partisan approach which he attributes to his 11 years in the state Legislature. While there, he earned accolades from leaders on both sides of the aisle with Lt. Gov. Casey Cagle, a Republican stating that Reed “genuinely puts what’s in the best interest of the city and state ahead of politics.” This is a far cry from the slash and burn, take-no-hostages approach of Chicago’s mayor.
Moreover, Reed is committed to tackling the pension problem regardless of the political implications. Indeed, he stated that “This was going to blow up at some time, either while I was in office or shortly after I got out. I could have duct-taped it and escaped. But it was going to explode on a new mayor.”
A refreshing take from a mayor thinking about the city he will leave behind once his tenure is complete. Unfortunately for Mayor Emanuel, the realities pose an inconvenience for the politics. If the city were to pay for the increased pension tab solely with property tax revenue, homeowners would see a hike of nearly 50 percent on the city portion of their tax bills. Moreover, the 2015 budget must be proposed and the council must approve it late next year, just as the municipal election season gets underway. But in the mayor’s own words, his re-election should not be the focus. Rather, it’s the potential burden on taxpayers. I agree.
The Municipal Maven 