Chicago
And the unfunded liabilities.
The following piece was written by Mary Williams Walsh, the managing editor of News Items and one of the very best reporters on the subject of municipal finance. She’s spent the last couple of weeks digging into the city of Chicago’s many public pension funds. This is her report. It first appeared in Political Items a while back.
When Chicago’s mayor-elect, Brandon Johnson, is sworn in on May 15, he’ll inherit an albatross: the weakest pension system of any major American city. Its relentless cash calls have been squeezing city programs for years, helping to spur the departures of thousands of over-taxed, under-served residents.
It’s a problem of too much debt, not unlike the one now playing out in Washington, but with a twist: Chicago can’t get into a bipartisan standoff over its pension debt, because Chicago is a one-party town. It hasn’t elected a Republican mayor since 1931. Johnson, a former teacher and union organizer, won by beating out a fellow Democrat–Paul Vallas, a moderate with extensive business and police support–in a runoff election.
A little history helps show how this happened. In 1995, Mayor Richard M. Daley (son of the storied Mayor Richard J. Daley) championed a law that put the school district under the mayor’s control, and set the teachers’ pension fund on a 50-year “funding plan” that effectively starved it of money.
Defined-benefit pensions are expensive to provide, and Mayor Daley had other things he wanted to do with the money. He used his new powers to install his budget director, Paul Vallas–yes, that Paul Vallas–as head of the school district, where he sought to cut costs. The teachers kept building up their underfunded pensions. When Vallas moved on, Mayor Daley named Arne Duncan.
Duncan announced plans to close dozens of failing schools and replace them with charters. For the Chicago Teachers Union, it was like a declaration of war. No longer content just to negotiate contracts for teachers, the CTU shifted into political action, rallying its members around social-justice goals ranging far beyond teaching: affordable housing, universal childcare, reproductive rights.
Duncan went to Washington as Barack Obama’s education secretary; in Chicago, the CTU moved into high gear, networking with other progressive groups and throwing money and volunteers behind candidates for state and local office. One was Brandon Johnson, who won a seat on the Cook County commission with the union’s support.
For the CTU, the office of the mayor was the big prize, because the mayor had control of the public schools. The union had no time for moderate Democrats. When Rahm Emanuel returned from Washington and was elected mayor, the CTU said he was just like Daley and mounted a massive strike. It struck his successor, Lori Lightfoot, too. In the just-ended runoff election it branded Paul Vallas “a closet Republican.”
Johnson beat him by about 26,000 votes, just in time to face a severe and intensifying cash squeeze. Interest rates have gone up. It will cost more to borrow. Tax revenues are sluggish. The federal stimulus money, so helpful during the pandemic, will soon run out. In Washington, House Republicans are trying to claw back any unspent portion.
And then there are the pensions.
It isn’t just the teachers’ plan. Chicago owes hundreds of millions of dollars to thousands and thousands of other retirees. Officially, the city has just four pension plans, but you can easily find twice that many, or even more, if you go looking in Chicago’s special-purpose districts and independent authorities. There are pensions for teachers, pensions for park crews, pensions for mass-transit drivers, pensions for college professors, pensions for the people who fix the water mains, all technically separate from the city but supported, at least in part, by city residents. All are underfunded.
The pension funds don’t use the same accounting format, the same funding practices, or even the same fiscal-year calendars. You can’t add them up to get the big picture. But they do have one thing in common: They are “mature plans,” with lots of retirees who need to be paid, and more retiring every year.
It’s punishingly difficult to run a severely underfunded pension plan with cascading rolls of retirees. Chicago’s taxpayers, and in some cases state taxpayers, have to keep putting in new money as it’s paid out, especially after a year like last year, when the plans’ investments lost money.
Actuaries for the teachers’ plan warned in a recent report that the fund had only enough money to last seven or eight more years. Researchers at the University of Chicago say the city spent one-fifth of its 2023 budget shoring up just its four official pension funds. That crowds out spending on other city services, and the worst of it is, it’s never enough to fill the hole. The pension funds will need to be replenished again next year and the years after that.
Outgoing Mayor Lightfoot had the benefit of the fiscal stimulus during her term and contributed hundreds of millions of dollars more than required to the pension system. She also built up city reserves, pegged property taxes to inflation, and worked to bring a casino to Chicago, to kick off hundreds of millions more for police and fire pensions.
Credit analysts rewarded Lightfoot by moving Chicago’s general obligation bonds out of junk territory for the first time since 2015. But lawmakers in Springfield undercut her, legislating to increase Chicago’s police and fire pensions without providing any money to cover the added cost.
“Irresponsible!” fumed Lightfoot, but just like Daley back in 1995, the state has other uses for the money. Governor J.B. Pritzker campaigned successfully to host the Democratic national convention in Chicago next year; presumably labor peace and safer streets will make a better backdrop for Democratic politicking than stable pension funds and investment-grade bond ratings.
You get the feeling Johnson doesn’t yet grasp how big this problem is, or how hard it will be to fulfill his progressive agenda while keeping promises to city retirees. He correctly says the seeds of today’s pension disaster were planted decades ago, when city and state officials dispensed with proper pension funding.
But blaming the past doesn’t make the missing money appear. If Mayor Daley couldn’t afford the pension system back then, how can Johnson afford it today?
By taxing the rich, of course. Johnson has called for a “mansion tax” on home sales over $1 million; a “big banks, securities and speculation tax” on trading; a “Chicago jet fuel tax” on the big airlines; a $4-per-employee-per-month “head tax” on large corporations; and new user fees “on high-end commercial districts frequented by the wealthy, suburbanites, tourists and business travelers.”
Initially, he also called for taxing the suburbanites who ride the trains to jobs in the Loop “to earn their disproportionately higher income.” But there was an uproar and that idea was shelved.
Still, you can see the thinking. There’s somebody out there with “disproportionately higher income,” and Mayor-elect Johnson thinks they should fund his blue utopia.
But you can’t tax the rich if the rich are leaving. Last year four large companies left Chicago: Boeing, Caterpillar, Tyson Foods, and Citadel, the big hedge fund. With them went hundreds of taxpaying employees and millions in philanthropic dollars.
McDonald’s has so far stayed put, but its CEO, Chris Kempczinski, recently told the Economic Club of Chicago that high taxes and rising crime were making it hard to recruit.
“There is a general sense out there that our city is in crisis,” he said.
It takes a long time to kill a city–Detroit’s bankruptcy developed over a period of decades. But you can hasten the process if you lock residents into policies that don’t make any financial sense. You can’t expect people who don’t have secure jobs or pensions themselves to pony up to keep a vast civil service comfortable in retirement.
Last year, more than 94,000 people moved out of Cook County, which overlaps much of Chicago. In a recent survey, 34 percent of Chicago respondents said they would like to leave the city, given the chance. Mayor-elect Johnson needs to listen to them. Low-tax Indiana is right next door.
(In February the Illinois Policy Institute released a documentary about the Chicago Teachers Union, “Local 1: The Rise of America’s Most Powerful Teachers’ Union.” It’s worth watching and available here.)