State Budgets

Hey Chicago, Whattya Say? Chapter 9 On the Way?

When Detroit filed for Chapter 9 municipal bankruptcy, observers offered many reasons for the city’s dire fiscal condition. Corruption and downright poor management are obviously to blame, but others point to de-urbanization, the shrinking American auto industry, or even income inequality as drivers of Detroit’s inability to pay its bills. A very narrow discussion just about Detroit’s condition fails to tell the the truth that approximately 100 cities across America face profound fiscal challenges very similar in scope—even with more diverse economies and steadier population. In fact, Chicago is one of those cities.

Public employee retirement costs helped push Detroit into bankruptcy. Emergency Manager Kevyn Orr cites a $3.5 billion unfunded public pension liability. Using fiscal year 2011 data and Moody’s Investors Services’ updated process for adjusting public pension plan liabilities, State Budget Solutions uncovered a  $3 billion unfunded liability. That figure will likely be larger when more up-to-date financial data is available. Both totals are far greater than the $600 million Detroit “self-reports”.

Detroit’s unfunded pension liability alone works out to over $4,300 per person when using the $3 billion total. Detroit also faces $5.7 billion in unfunded retiree healthcare obligations. Simply meeting fiscal year 2013 required contributions for pension and retiree healthcare costs, based on the city’s own massively undervalued calculations, would have required 33 percent of the entire year’s revenues.

Chicago is a prime example of a city on the brink and, like Detroit, is sinking under the weight of unfunded pension liabilities.

Chicago’s Moody’s Investors Services bond ratings recently dropped from A3 to Aa3, highlighting just how perilous Chicago’s financial situation really it. The drop reflected, in Moody’s words, the city’s “very large and growing pension liabilities and accelerating budget pressures associated with those liabilities.” When it comes to employee retirement obligations, Chicago may even be in a worse position than Detroit.

Officially, Chicago’s four public pension plans plus the Teacher’s Retirement Fund total an unfunded liability of $27 million. Adjusting those liabilities according to Moody’s method, though, reveals that the unfunded liability is $54.8 billion. That amounts to $20,194 for every man, woman, and child in Chicago. City contributions to public safety pensions will skyrocket, from $467 million in 2014, to $1.2 billion in 2015.

Unfunded retiree healthcare liabilities are over $1 billion, and a 2013 report commissioned by the City of Chicago found that, with regards to retiree healthcare costs, “continuing the existing financial arrangement is not a viable course of action.” Even Mayor Rahm Emanuel has stated that addressing the problem without significant pension reform would require significant sacrifices by Chicagoans, including a 150 percent property tax hike and increasing class sizes in Chicago Public Schools to an average of 55 students.

In the face of this problem, leaders in Chicago and Springfield must take immediate action to address public pension and retiree healthcare liabilities or face severe consequences, including bankruptcy. They need only look a few hundred miles east to Detroit to see the city’s future should they fail to act.

The ideal step needed to stop Chicago’s slide toward bankruptcy would be a shift towards a defined contribution style retirement system. Defined contribution plans are designed to provide retirement security without putting taxpayer money at risk, coupled with an aggressive schedule to close the current funding gap. Half-measures, set in place to maintain a broken status quo, must be avoided at all costs.

Of course, the political and legal feasibility of altering earned benefits is up for debate. To that end, leaders in Chicago and across the country should a keep keen watch on Detroit’s bankruptcy proceedings for guidance.

Today, Chicago residents can count on their streetlamps working tonight and the police responding to emergencies in well under an hour. Unless they demand immediate action to address public employee retirement costs, that may not be true tomorrow.

In Depth: State Budgets

Smart budgeting is vital to a state’s financial health. The ALEC State Budget Reform Toolkit offers more than 20 policy ideas for addressing today’s shortfalls in a forthright manner, without resorting to budget gimmicks or damaging tax increases. One way to stabilize budgets over time is to embrace…

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