Chicago's media have been telling its people for years there's a financial crisis. It hasn't fully felt like one, at least not in the booming parts of the city. But all of a sudden things are getting real, thanks to Moody's downgrade of the city and its school district's debt to junk.
The downgrade created a liquidity crisis. To respond, the city plans to issue $1.1 billion in long-term bonds.
While some sort of refinancing may be required, the proposed debt issue contains maneuvers similar to those that helped get Chicago into trouble in the first place—including more scoop-and-toss deferrals, $75 million for police back pay, $62 million to pay a judgment related to the city's lakefront parking-garage lease and $35 million to pay debt on the acquisition of the now-vacant site of the former Michael Reese Hospital.
Most dubiously, the city actually is borrowing the money to pay the first two years of interest payments on these bonds. In true Chicago style, the proposal passed the City Council on a 45-3 vote. Hey, at least the city is getting out of the swaps business.
Then there's the crisis engulfing the city's schools. After Chicago Public Schools coughed up a $634 million pension payment as required, it faces 1,000 layoffs and other painful cuts to avoid running out of cash. A recent Ernst & Young report said that even if CPS got another five-year pension-contribution holiday, it would still rack up an additional $2.4 billion in accumulated deficits by 2020.
Meanwhile, the Chicago Teachers Union, hostile to any reform that would affect teacher salaries and benefits, says that the district is “broke on purpose.” And CPS has no permanent CEO in place after Barbara Byrd-Bennett resigned last month amid a federal investigation into no-bid contracts.
Emanuel says his previous pension reforms will pass constitutional muster and wants Springfield to pay for Chicago's teacher pensions going forward. He makes strong arguments but is up against a very pro-union court system and a dysfunctional state that itself is deep in the hole. Perhaps recognizing this, instead of reform, he simply proposes to defer and extend payments on police and fire pensions. Even so, Crain's projects that this would raise the city's slice of property taxes next year by 31 percent.
Add this up and even with no further gimmicks, Emanuel will be six years into his mayoralty before the city can stop borrowing just to pay the interest on its debt, take the full eight years of both his terms to get the city to a structurally balanced budget without scoop-and-toss, and 10 years in before getting the city on track to fund pensions.
To put out Chicago's “Great Financial Fire” and create a legacy of lasting fiscal stability, Emanuel should not let this crisis go to waste but use the opportunity to accelerate, not defer, painful choices. This means declaring a hard stop on gimmicks like borrowing for current expenses and scoop-and-toss after the current bond issue and structurally balancing the budget now. Yes, aggressively defend the pension reform deals—but just as aggressively put the city on track to full funding even at the expense of current pain.
And a few more things: Join with Gov. Bruce Rauner to fight for legal changes at the state level to require all future local employees to receive 401(k)-style pensions only, and to prohibit any enhancements to existing legacy pensions, in order to prevent a repeat of the current problems.
Easy? No. Painless? No. Which is why a strong leader like Emanuel should be taking them on.
Aaron M. Renn is a senior fellow at the Manhattan Institute for Policy Research in New York and a contributing editor at its magazine, City Journal, from which this piece was adapted.