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| Mayor Rahm Emanuel at City Council Meeting on 2016 Budget Chicago Tribune |
News broke this week of a proposal
by Chicago Mayor Rahm Emanuel to hike property taxes for city residents by $588 million
over the next four years. Tax increases are certainly not uncommon, but what
caught median attention was the direct link between the need to raise taxes and
the fact that the tax revenue would be directed to shore up underfunded public
employee pensions. Community residents suddenly find themselves faced with
the stark reality that their ability to fund their own retirement savings will
be compromised by the city's need to fund the retirement of its employees.
The news followed recent downgrades
of the City of Chicago in May 2015 to junk bond ratings. In lowering the city’s
rating, Moody’s Investors Services cited “the
city’s highly elevated unfunded pension liabilities” continuing, “we believe that the city’s options for curbing growth in its own
unfunded pension liabilities have narrowed considerably.” This thus
points to the most troubling concern about public employee pension liabilities:
that even well-intentioned efforts at pension reform may take years to slow the
growth of unfunded liabilities.
For taxpayers of the City of Chicago,
the pension deficits of the city are additive to those of the State of
Illinois. In a working paper of the Harvard Kennedy School of
Government in 2012, the authors estimated that the household public employee
pension burden of taxpayers in the City of Chicago – that is, each individual
family’s share of unfunded public employee pension liability - totaled $81,118,
comprised of $41,966 for their share of City of Chicago liabilities and an
additional $46,152 for the share of State of Illinois underfunding. If
you happen to live in the City of Chicago, you might want to start planning for
how you will pay this obligation. Failing an economic miracle or a
Federal bailout, the taxpayer is the only resource for paying this deficit.
Pension liabilities have now been cited
as the reason for credit downgrades in Connecticut, New Jersey, Pennsylvania
and Puerto Rico, as well as for the cities of Cincinnati, Philadelphia,
Detroit, Chicago, Evanston, Omaha, Jacksonville, Des Moines and Minneapolis,
among others. These credit
downgrades stand apart from the local governments that have suddenly and
dramatically been plunged into bankruptcy like the cities of Stockton, Detroit,
San Bernardino, Vallejo, Harrisburg and Central Falls.
For states, like the State of Illinois,
the problem is even more complex. While cities, individuals and private
businesses can reorganize their liabilities in bankruptcy, no such provision
exists for the states, at lease under current law. Without the legal ability to
restructure their pension obligations in bankruptcy court, states faced with
pension deficits similar to those of Illinois must opt for one of two
unenviable choices. They can raise taxes, where possible to fund the replenishment
of their pension fund, or they can reduce general services to residents to
provide budget relief for funding the shortfall. But in many instance the tax route isn’t
just unpopular, it’s simply not practical. According to Moody’s, to fully
fund the City of Chicago’s annual required pension contribution would
necessitate raising its property taxes by 95%.
A recent report of Alliance Bernstein
quantified the annual pension costs, debt service and fixed charges of the City
of Chicago at 40% of
its general fund budget. That would mean paying just these items, would require
that all the other vital services of the city, including police, fire,
sanitation, public works, etc., must all get crammed into an ever shrinking
portion of the pie, now just 60% of the total budget.
So just what happened to turn these
pension funds so horribly upside down? First,
in the case of the Chicago Police Benefit Fund, average salaries grew by 55%
over the past fifteen years, or roughly 4% per annum – not unreasonable. Average pension benefits, however,
grew by 79% over this same period, while the number of former employees
receiving retirement benefits increased by 45%.
Modest annual salary increases, coupled
with rising benefits and an accelerated population of retirees, spelled soaring
benefit payouts for the fund, with total retirement benefits growing by 160% over the same period. Plan
contributions simply failed to keep pace. The solution, it now appears, falls
squarely on the shoulders of its taxpayers.
You can read more about the US state
and local government pension crisis in my new book: Up In Smoke: How the Retirement Crisis Shattered
the American Dream, available on Amazon, iTunes and Barnes and Noble
bookstores.
