The PJ Tatler

Looming Pension Crisis Roils Chicago's Mayoral Runoff

It’s the number one fiscal issue facing Chicago and both incumbent Mayor Rahm Emanuel and his challenger, Cook County Commissioner Chuy Garcia are refusing to face up to reality. The city’s $20 billion pension shortfall is partly the result of demographics and partly because of shortsightedness on the part of previous tenants of city hall.

The fact is, many of those pensions were agreed to 30 years ago when Chicago had a population 15% larger. With a fleeing population and shrinking tax base, the numbers simply don’t add up anymore and the city now finds itself on the brink of ruin.

Neither candidate is willing to discuss it, but everyone not involved in the campaign agrees that the only way to deal with the crisis is to raise property taxes.

Bloomberg:

“Limitations on benefit reforms will likely leave large tax increases as the only viable solution, a challenge given the city’s historical reluctance to tap its property tax base,” Matt Fabian, a partner at Concord, Massachusetts-based research firm Municipal Market Analytics, said in a March 16 report.

Chicago isn’t master of its financial destiny. State legislators would have to approve a tax on the 600,000 commuters who work in the city, or any effort to impose an income tax.

Emanuel, former chief of staff for President Barack Obama, floated a $250 million property-tax boost last year to pay for pension obligations. He dropped the plan in the face of City Council opposition, and is taking a different route this time. He’s proposing to build a casino, dedicating the revenue to retirement debt, and extend the sales tax to services. Again, he can’t do either without state approval, and even with that consent, the casino wouldn’t be built in time to contribute to next year’s pension payment.

A property-tax increase, though, is within the city’s direct control. The levy generated $824 million last year, equivalent to about 9 percent of this year’s spending plan, according to Chicago’s annual financial analysis.

The population of the nation’s third-most-populous city fell 7 percent in the last decade to 2.7 million, according to the Census Bureau. The drop increases pressure on the tax base to pay for retirement commitments, some made decades ago.

“The problem is you’re paying the bills of the city of 30 years ago with today’s population,” said Norton Francis of the Tax Policy Center in Washington. “That’s a huge challenge for cities.”

In Chicago, property taxes have risen even as housing values dropped. The effective tax rate jumped 32 percent from tax year 2003 to 2012, according to the Civic Federation, a nonprofit research group specializing in government finance.

Although the national recession ended in 2009, housing values in parts of the South Side have yet to recover, according to the Institute for Housing Studies at DePaul University. The area is home to many mostly black precincts, where Emanuel’s support has dropped relative to the 2011 election.

Opposition to property taxes is part of the campaign dialogue. Emanuel criticized Garcia for a vote he cast in favor of a higher levy — in 1986.

With new Republican Governor Bruce Rauner proposing to reduce the state’s contribution to Chicago by about $135 million, and a billion dollar shortfall in the budget for Chicago Public Schools, it’s hard to see how any mayor can work the magic necessary to stave off disaster.