Digging out of city’s financial hole has to start with pension reform
August 1, 2013 6:02PM
Updated: September 3, 2013 7:41AM
Chicago is not Detroit,
Chicago’s economy has little in common with one-industry Detroit.
As City Hall’s finance folks tell us, Chicago isn’t even halfway down the road to becoming Detroit.
But Chicago nonetheless is headed toward a disastrous financial cliff that profoundly threatens the city’s stature and quality of life.
A massive pension bill comes due in 2015. Absent cuts to pension benefits or new revenue, the resulting deficit will be $1 billion in little more than a year, the mayor’s finance team predicts.
The only solution is what Mayor Rahm Emanuel is pushing — cutting and reforming pension benefits for the city’s four retirement systems, covering police officers, firefighters, laborers and civil servants, to both save those systems and to set Chicago on a sustainable long-term path.
Until that happens, the mayor and his team refuse to even entertain a discussion of raising taxes.
For more than an hour before the Sun-times Editorial Board on Thursday, the city budget director and chief financial officer went through contortions to avoid talking about raising property or sales taxes, even if pension reform were to pass.
Their marching orders from Emanuel clearly were to focus solely on pension reform.
That’s the right approach — open the revenue door, even a crack, and the momentum tilting toward desperately needed pension cost-cutting is lost. Budget Director Alex Holt went out of her way to note how the state raised its income tax rate, but has yet to follow with comprehensive pension reform for current public employees.
But here’s what the finance folks couldn’t say: a significant tax increase is in the cards for Chicago, even if pension reform passes. Given the massive size of the city’s pension obligations, the likelihood of a legal challenge to any pension reform, and the mismatch between expenses and revenue — even if you subtract the pension bill — the city will have little choice but to raise new revenue. That has for too long been the third rail in Chicago. Chicagoans cannot have the services they want if no one is willing to pay for them.
In its triple downgrade of Chicago last month, Moody’s Investors Service waved this flag, noting the city’s historic reluctance to raise local taxes. Moody’s suggested that Chicago has “nearly unlimited” ability to raise property and sales taxes and could use it to reverse chronic underfunding of its pension funds.
That’s the groundwork for the discussion to come, one we’ll wait for until after the state Legislature, which sets the rules for Chicago’s pensions systems, reforms the city’s pension systems. They also should do the under-funded Chicago Teachers’ Pension Fund while they’re at it.
And that can’t happen soon enough. And by that, we mean this month.
In the meantime, City Hall has a tremendous amount of work to do.
Mayor Emanuel’s 2014 city budget, which he’s gearing up to present by Oct. 15, is no breeze. It includes, at the moment, a deficit of $339 million. The mayor’s team plans to first reduce costs through greater efficiencies, and they have done an admirable job on that front in the last two years. The mayor’s team has relied on cost-cutting, modest revenue growth and new ongoing revenue to close deficits, breaking from the previous administration’s practice of relying on one-time revenue hits.
But the easiest cost-cutting is largely done, making that work more and more challenging.
Closing a $339 million gap will not come without pain in 2014.
Closing a $1 billion gap in 2015 will inflict even more pain.
Pension reform first. Revenue to follow.