While all eyes have been focused on the budget battle in Springfield, Chicago has a budget crisis of it’s own to manage. In May, when Republican Governor Bruce Rauner addressed the Chicago City Council, he made it clear that Chicago could not look to Springfield to solve its budget issues. Currently, Governor Rauner and House Speaker Mike Madigan are locked in a fierce budget battle of their own, which leaves Chicago on it’s own to solve its own budget crisis.
To understand the Chicago budget crisis fully, it is necessary to look at how the crisis was created. Here is the simple breakdown. The city of Chicago is responsible for paying for a portion of retirement benefits for its unionized employees, who are responsible for paying the other part. In return, when those employees retire the city guarantees them a portion of their salary (pension) along with medical and dental benefits. The city currently contributes to the Municipal Employees’ Annuity &Benefit Fund of Chicago (MEABF), Laborers’ & Retirement Board Employees’ Annuity & Benefit Fund (LABF), Policemen’s Annuity and Benefit Fund, and Firemen’s Annuity and Benefit Fund.
Over the last 15 years while city employees continued to pay their share, the city was not paying its share. According to the Commission to Strengthen Chicago’s Pension Fund’s Final Report, “the Funds had lost ground in the falling market of the 2000-2002 ‘dot-com bust’ but had not substantially recovered in the subsequent rising market, despite good returns on investment.” This required the city to borrow money to pay the benefits for a steady stream of retirees, essentially putting it “on the credit card.” As the city continued to charge the pension payments, the interest payments on that debt grew, requiring the city to borrow more money just to keep up with the interest payments, creating a “vicious cycle” whiled leaving the pensions woefully underfunded according to the report.
The city essentially reached its credit limit in May, when Moody’s Investor Services downgraded Chicago’s bond rating status to junk. That means that the cost of borrowing money increases dramatically. It also means that Chicago it will be less attractive to investors, with some pension funds even being forbidden to purchase bonds with a junk rating. All parties agree, Chicago has got to solve the pension crisis, and none of the solutions are pleasant.
The Emanuel Administration spent its first term laying the blame for every tough decision at the feet of the “previous” administration, rightfully so. In his last years, Mayor Daley made some questionable decisions to balance budgets, including selling the Chicago Skyway and the infamous parking meter deal. But as Mayor Daley fades in the minds of Chicagoans, the pressure is on Mayor Emanuel to give answers, and blaming the previous administration will not be enough for the taxpayers.
In 2012 Emanuel resurrected an old Daley favorite, privatization of Midway Airport. to try to discuss the pension deficit structurally. The idea was tabled when the winning bidder declined the offer. Emanuel has also been said to favor a Chicago-based casino, but with the current budget impasse in Springfield, that solution is still a way off.
Most recently, Emanuel proposed a state law that would cut retiree benefits in exchange for repaying the pensions unfunded liability. Judge Rita Novak struck the law down as unconstitutional. It was Emanuel’s second attempt to fix the city’s budget through Springfield, with the first attempt being struck down in the Illinois Supreme Court. Things do not look good, and from all accounts, Emanuel is preparing for the worst.
The Chicago Defender obtained a letter from Alex Holt, Director of Office of Management and Budget to Chicago aldermen “regarding the acceleration of the 2016 budget process.” She says, “This year’s budget will be extremely challenging, in large part because of significant pension obligations, and it will require some difficult choices, both in terms of reforms and revenue. But through consistent and constructive collaboration, we can establish a comprehensive budget that makes responsible financial choices while continuing to make essential investments in neighborhoods, infrastructure and public safety.”
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