US public finance: Day of reckoning
By Neil Munshi and Norma Cohen
Chicago is tackling the worst pension crisis in the US. But methods that got it into its bind are still used across America.
Since the start of this school year, Annie Stoball has been walking her nine-year-old granddaughter Kayla across four blocks to Gresham Elementary on Chicago’s South Side. The route takes the pair through turf claimed by rival gangs – a far more dangerous journey than to her old school, Morgan Elementary, just across the street from their house. So far this “safe passage” trip – the city has hired monitors to watch over the children – has been uneventful.
“Kayla feels safe because I walk her to school every morning and I pick her up when it’s done. My concern is how long they’ll stay out here,” she says, referring to the safety workers.
Worst funded cities and states
Morgan was one of about 50 elementary schools forced to close this year, collateral damage from the ballooning pension crises in Chicago and the state of Illinois. The budget gap in Chicago’s school district alone is $1bn, mainly because of pension liabilities, while the combined unfunded pension liabilities of the city and the school district runs to over $27bn.
Rahm Emanuel, Chicago’s Democratic mayor, has said the school closures – along with 3,000 job cuts in the school system – were necessary to close the yawning hole in the district budget. The episode has further soured the mayor’s relations with the teachers union, which held a seven-day strike last year. Karen Lewis, head of the union, called the school closures “racist” and “classist”.
The woes of the city and the state of Illinois – which has its own, worst-in-the-nation, $100bn unfunded pension liability – have been driven primarily by the government’s failure to pay its share to keep its pension promises.
But this month, after years of inaction, Illinois passed a bill to tackle its unfunded pension liability. The state hopes the new law will save $160bn over the next 30 years – savings that will come from cuts in retirement benefits for state workers and forcing the state to make its pension contributions. The law has won plaudits as a first step towards fiscal reform. But it comes only after repeated downgrades that have left Illinois with the lowest credit rating of any US state.
Now it is up to Mr Emanuel, the hard-nosed former Obama administration official, to do the same for Chicago. Any proposal to solve the city’s pension problem is bound to look much like the state deal – cutting benefits for public workers and raising contributions.
“The pension crisis is not truly solved until relief is brought to Chicago and all of the other local governments across our state that are standing on the brink of a fiscal cliff because of our pension liabilities,” Mr Emanuel said after the state deal.
The Chicago teachers’ pension fund is roughly 54 per cent funded, far below the 80 per cent threshold considered healthy. But it is better off than the city’s municipal workers, police, labour and firefighters’ pension funds, which Fitch, the credit rating agency, estimates are collectively 33 per cent funded.
Mr Emanuel has warned that failing to reform Chicago’s pensions by next year could force cuts in services – including the police department, at a time when the city has had the highest number of murders in the US. The alternative, he says, would be a 150 per cent rise in property taxes.
His administration points to the recent reform of the city’s parks department’s pension system as a model. Retirement ages were raised, with workers no longer able to retire at 50 with full benefits, employees will pay more towards their retirements and the city will increase its contributions.
Still, Mr Emanuel has been criticised for backing plans to delay some payments, and Moody’s has attacked Chicago’s latest budget for failing to set aside enough money for pensions. And the unions are preparing to fight back in Chicago, just as they have against the state deal, which they are challenging in court. A coalition of unions called the state reform “attempted pension theft”.