It was once a hell of a town. It’s now broke. Myriad forces contributed to Chicago’s state of affairs, not the least of which is the city council’s refusal to confront its reality and do something about it, like raise taxes through the roof to pay for its profligate spending. But the kicker is that the can once down the road is now in their face, and no amount of praying or pretending is going to make the can go away. The can? Public employee pensions.
The Windy City’s woes are the product of decades of fiscal profligacy and a cautionary tale to policymakers in every region and at every level of government: Retirement benefits are like free junk food to politicians — everyone loves them, and the bills don’t arrive until later. They can be ruinous for a city’s long-term fiscal health.
To fully appreciate the folly, a politician can look brilliant and popular by settling union negotiations with sweet, sweet pensions because they don’t get paid until long after the pol is out of office, legacy intact. The public employees love them for their giveaways. The public loves them for holding the line on taxes and preventing any job actions that could inconvenience them.
It’s a win-win for the politicians in office at the moment. For the pols who take office in the future, they’re screwed.
At the heart of Chicago’s deficit are decades of increasingly generous retirement benefits offered by Chicago’s leaders to more than 30,000 public employees, a politically powerful constituency. Today, a city employee retiring after 35 years with a final salary of $75,000 would receive combined pension and retiree health benefits of about $77,000.
The Big Three automakers learned this lesson when they nearly took Detroit down, but were bailed out of their folly by the federal government’s largesse. When you bought an American car, you were paying for both the car and the past 50 years of employee pensions. Of course, if the automakers went bankrupt, that’s the price of making poor business decisions, although it also meant tens of thousands of people losing their jobs in the process. That would make the government look bad, and the government hates to look bad.
It is, of course, possible for a city to avoid this pension shock by socking away money all along to cover future pension costs. That would be the fiscally prudent thing to do, spread the pain over the years the debt accrues, since the public is getting the benefit of the employees’ efforts at the time and future citizens shouldn’t end up suffering for the sake of public services long ago delivered.
The City government has failed to fund those pension promises fully and the bill has come due. Retirement benefits and debt service together made up 43 percent of Chicago’s budget in 2022, the highest rate of any U.S. city. Chicago spends more on debt and pensions than it does on the police and infrastructure, according to an analysis from the Illinois Policy Institute, a libertarian-leaning policy group. In other words, Chicago is paying for the past, not investing for the future.
How is it possible that elected officials could give away the store and shift the cost to future generations? Easy. There are no laws that say you can’t, and the public loves it. After all, who doesn’t want free stuff, and providing public services to be paid for 20 years down the line is essentially free.
One reason it’s easy to allow pension-fueled deficits to keep growing is that there are very few guardrails. State and local government pensions are unregulated by the federal government, so they operate with much lower funding standards than federal government pensions or those offered by private companies.
Like private pensions, state and local governments should be required to assume conservative returns on pension investments and to address unfunded liabilities quickly, rather than letting funding shortfalls fester over decades.
Of course, no one really wants the federal government playing nanny over local government’s fiscal profligacy. After all, what’s the point of having local government if its nothing more than the federal government’s puppet? But then, there’s little incentive for the public to protest such profligacy when they’re getting the benefit of it.
What will become of Chi-Town? The city council has no interest in being the bad guy and raising taxes to cover the nut.
Mayor Brandon Johnson is the latest leader to attempt to close Chicago’s gaping fiscal gap: He proposed a $300 million property tax increase to partly fill Chicago’s $982 million projected budget deficit, only to be unanimously rejected by the City Council. The City Council narrowly passed a budget on Dec. 16, with far less in tax increases than the mayor had initially demanded.
Will Chicago be saved by a federal bailout, given the disastrous consequences its bankruptcy would have on the midwest? Or will it be left to clean up its own mess? Remember 1975, when President Ford told New York City to “drop dead”? And if you don’t think this is happening where you live as well, you should sit down, as I have something to tell you and it’s going to make you sad.
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You’ll recall the city of Detroit did file bankruptcy and city pensions surely played a part.
To be fair Ford motor borrowed money from the federal government but did pay it back I believe.
I remember reading many years ago that Chicago was heading toward this.
Came here to say exactly that. The auto bailout was a great success — remember the Obama reelection slogan, “Chrysler’s alive and bin-Laden is dead”? Moreover, Detroit’s bankruptcy was also a success. The pain was spread around rather than landing on one group (like property-tax payers). I haven’t studied the Chicago situation or what stakeholders there are who would have to absorb specific amounts of pain, but if it went anything like Detroit, it’d be a huge success.
Many state and local pensions are poorly funded. Pensions funded at 90% of their liabilities are rare. Appendix B in this article is illuminating. It looks like the State of Illinois pensions aren’t in much better shape than Chicago’s.
[Ed. Note: Link deleted per rules.]
I am (of course) confused. As Nobelist Krugman has often explained, a government deficit (at least Federal) is no big deal. “The point is that in the early 2010s, the last time we faced a potential crisis over the debt ceiling, there was an elite consensus that budget deficits were a severe, even existential threat. This consensus was, in retrospect, completely wrong.” Borrowing to pay everyday expenses (for governments but not people?) is easily taken care of.
[Ed. Note: The feds print money. States and cities do not.]
Very minot quibble. The feds do print something commonly called “money”, but that is really just a piece of paper, like the receipt you may (or maybe not) ask for when you buy something at Walmart. The real money only exists in computer accounts at the Treasury or the Federal Reserve. And the Feds can spend whatever they are permitted/ encouraged to spend by the Congress.
The bureaucrats in the Treasury just sit down at a computer terminal periodically to check the amount spent from these accounts, and add any needed zeros to certain specific numbers, to make sure that other specific numbers never go negative. Because a lot of people have an irrational fear of negative numbers.
Pension bonds are indeed a thing, but there are problems and risks. First of all, when a city floats bonds to invest the proceeds for its pension fund, there is always a possibility that market shifts will stick the city in a negative arbitrage posture (i.e., market losses erode the cash infusion, but the city still has to cover debt service on the bonds). If that happens, the bond issue has just dug the hole deeper.
Second, from a tax equity and accounting match perspective, the pension bonds spare the past taxpayers who didn’t cover actuarial costs and shift that burden in its entirety to the future taxpayers who must pay the bonds.
Third, when the aggregate of a city’s outstanding bonded indebtedness and unfunded pension liabilities already threaten its solvency, it will be hard to market pension bonds, due to the prospect of a Chapter 9 haircut for bondholders.
Two of my children are homeowners in Chicago. I occasionally ask what they think about the city’s fiscal travails. They have no clue or concerns. Ah to be young.
There is a split among U.S. jurisdictions on whether sound actuarial funding is part of the pension contract. Some, like California, have posited that the funding level needed to provide reasonable security for the expectations of pensioners is part of the promise. Others, like Illinois, see no breach so long as benefit payments are actually made when due. Detroit, however, illustrates the problem with the latter approach, as it does no good to finally recognize the breach just as the obligation becomes permanently impaired through Chapter 9 bankruptcy.
There won’t be a federal bailout, and the scenario playing out in Chicago means somebody is getting screwed. It may be pensioners, bondholders, general business creditors, or some combination of all of them. And that, too, will be determined by what is easiest for the can-kickers.
Pension bonds are indeed a thing, but there are problems and risks. First of all, when a city floats bonds to invest the proceeds for its pension fund, there is always a possibility that market shifts will stick the city in a negative arbitrage posture (i.e., market losses erode the cash infusion, but the city still has to cover debt service on the bonds). If that happens, the bond issue has just dug the hole deeper.
Second, from a tax equity and accounting match perspective, the pension bonds spare the past taxpayers who didn’t cover actuarial costs and shift that burden in its entirety to the future taxpayers who must pay the bonds.
Third, when the aggregate of a city’s outstanding bonded indebtedness and unfunded pension liabilities already threaten its solvency, it will be hard to market pension bonds, due to the prospect of a Chapter 9 haircut for bondholders.