Chicago Finances in BIG TROUBLE- The Blue State Reckoning
Liberal pension excesses are now jeopardizing liberal priorities.
From WSJ 8/12/2013
The crisis of liberal state and city government is arriving, with Detroit in bankruptcy and now no less a Democratic potentate than Mayor Rahm Emanuel warning about the fiscal mess in Chicago. The partnership of public unions and liberal politicians is hitting the wall.
In its recent Annual Financial Analysis, the Windy City disclosed that it faces a $368 million budget deficit next year and as much as $1.5 billion by 2016. Moody’s in July downgraded Chicago’s credit rating three levels with a negative future outlook, citing the city’s “very large and growing pension liabilities.”
Mr. Emanuel told state lawmakers last year that Chicago’s “day of reckoning has arrived.” And now, without immediate reforms, Mr. Emanuel writes in a letter accompanying the fiscal report, “the outlook for future years is unsustainable.”
He’s right. Chicago has chronically underfunded its pensions, and starting next year it will have to meet a state-mandated schedule raising the city’s pension payments to $479 million in 2014 and then to $1.07 billion in 2015. Chicago’s four pension systems are only 36% funded, with an overall unfunded liability of $19.5 billion this year and growing.
One reason Mr. Emanuel can’t afford these pension contributions is because he’s locked into unaffordable union contracts for city workers. Personnel costs currently make up 78% of Chicago government expenditures, and base salaries alone make up two-thirds. Between 2003 and 2012, the city cut its workforce by 20% but personnel costs have still gone up 15%.
Nine of 10 current city employees are unionized, and Mr. Emanuel’s team estimates that city workers (not including police and fire) got 16% pay raises between 2005 and 2012. That’s not quite as lofty as the 16% pay raise over four years that the Chicago teachers union negotiated last year, but it adds up. Chicago’s average annual cost per employee (including salary, health care and overtime) rose to $95,406 in 2012 from $58,299 in 2003.
Mayor Emanuel is the guy who rolled over last September for that new teachers contract rather than ride out an illegal strike that might have hurt President Obama, but he’s had plenty of political accomplices. Chicago is required under state law to have its pensions 90% funded by 2040, but the state also says the city can’t reform its pension obligations without consent from the dysfunction junction that is Springfield.
In May 2012 Mr. Emanuel asked the state to raise by five years a retirement age that can be as low as 50 depending on tenure and the kind of job; eliminate automatic cost-of-living increases for current retirees for 10 years; and have city workers raise their contribution to their retirement to 14% of salary from 9%. He also suggested giving younger workers the option to choose a 401(k) plan instead of a pension. Imagine that: a choice.
The mayor has been routed by the public unions that own the Democrats who run the state legislature. A state pension committee convened by Governor Pat Quinn has failed to come up with even a modest reform, leading the Governor to suspend lawmakers’ salaries. House Speaker Michael Madigan and Senate President John Cullerton are suing for back pay but they still won’t act on pensions.
Something has to give, and a likely candidate is city services. Mr. Emanuel recently laid off 2,100 Chicago education employees, including 1,000 teachers, and he blamed the layoffs on Springfield’s pension failures. The pension benefits that unions have negotiated are now killing the jobs of their fellow union members. As in Washington, D.C., the entitlement excesses of liberalism are jeopardizing current liberal priorities.
Many people have been predicting this crack-up for years, the inevitable result of a political alliance in which unions elect Democrats who pad benefits for unions, which then spend to re-elect Democrats, who repeat the cycle. The music stops only when the taxpayers are tapped out or the city and state can’t borrow any more. Detroit had its reckoning last month, and Chicago may be headed the same way unless its liberal politicians decide that a crisis of their own creation is a terrible thing to waste.
A version of this article appeared August 12, 2013, on page A14 in the U.S. edition of The Wall Street Journal, with the headline: The Blue State Reckoning
I wonder how this might affect you where you live. Does your town have similar under funded pension obligations? How will they solve the problem? More taxes or less benefits?