5 things you need to know about Chicago’s credit downgrades

5 things you need to know about Chicago’s credit downgrades

Talk of the next Detroit rings truer now than ever before.

Moody’s Investors Service hit the city of Chicago and its sister governments with a series of credit downgrades beginning May 12, dropping some city debt to “junk” status.

In simple terms, these downgrades will make Chicago’s penchant for taking on debt to cover city-government costs even more expensive. Standard & Poor’s handed a downgrade to the city on May 14. Fitch Ratings did the same a day later. To make things worse, the ratings slide comes just as Chicago is gearing up to sell more than $800 million in bonds.

The inflated cost of borrowing means that instead of funding public safety, education and infrastructure, scarce city resources will be used to cover the costs of a bad financial reputation.

Looking beyond the headlines, here are five things Illinoisans should know about the Windy City’s debt crisis:

1. Politician-controlled pensions are to blame

Political games and government-union strong-arming have created a house of cards when it comes to Chicago’s pension systems, which are underfunded to the tune of over $30 billion.

For a glimpse into the absurdity of the system, take the case of the average, recently retired city worker. If he spent his career working for Chicago government, he contributed less than $150,000 into the pension system, but will collect $1.5 million to $2 million in pension benefits over the course of his retirement.

The city workers who reap these benefits are not at fault. That said, just because this lucrative arrangement is in writing doesn’t mean its fair.

The middle-class, private-sector worker who foots the lion’s share of the bill can tell you as much. She would need $1 million to $1.5 million in the bank on her last day of work to experience a retirement on par with a career city worker.

2. Chicago isn’t Detroit, but it could still go bust

As Illinois Policy Institute Vice President of Policy Ted Dabrowski put it, “to go bankrupt, a city doesn’t need to look and feel like Detroit. It just needs the lethal combination of too much debt and a dysfunctional government.”

Chicago has that combination in spades.

The combined shortfall of Chicago’s four pension systems is six times larger than the city’s annual operating budget. The pension fund for firefighters has a mere 25 cents for every dollar it needs to pay future benefits. The policeman’s fund has just 30 cents.

In total, each Chicago household is shouldering more $60,000 in city debt.

It’s unsustainable. And it’s about to get worse, as a state law passed in 2010 will require Chicago to double its annual contribution to the police and fire pension funds come 2016.

What does that mean in practical terms? The city’s own financial analysis shows these additional pension contributions are equal to the cost of the following:

  • Keeping 4,000 police officers on the street
  • Putting 3,450 firefighters on duty
  • Resurfacing nearly 12,500 city blocks
  • Funding the entire Chicago Public Library system for six years

 3. Tax hikes won’t solve the problem, and could make it worse

An exodus of taxpayers was the nail in Detroit’s coffin, and there’s little reason to think Chicago wouldn’t experience a similar effect should the city raise property taxes by 50 percent, which is what Nuveen Asset Management estimated is necessary to properly fund city and sister-government pension systems.

Other experts have pegged the necessary hike at 60 percent.

Illinois as a whole is shrinking, and Chicago’s population growth is grinding to a halt. Raising taxes while public services flatline or worsen is a recipe for demographic disaster.

The state tried to fund skyrocketing pension costs through record tax hikes in 2011 and failed.

Before contributing a dime of new revenue to city coffers, Chicagoans should demand a major overhaul to the city’s broken defined-benefit pension systems.

4. Union leaders aren’t willing to embrace the drastic reforms Chicago needs to survive

When city officials in May proposed requiring teachers in Chicago Public Schools to pay 7 percent of their salary toward their pensions, rather than the current 2 percent, Chicago Teachers Union, or CTU, leadership called the idea “insulting.”

Expect any and all sensible pension reforms to be slandered in the next round of CTU contract negotiations, beginning this summer.

Instead of buying into this rhetoric, Chicago teachers should be insulted by the behavior of their union executives and the politicians who have appeased them for too long. The Chicago Board of Education is $1 billion in the hole, and Gov. Bruce Rauner has pledged the state will not bail out the district. Without massive reform, or a bailout from the city or state, the Chicago Board of Education will default. Would that be a positive outcome for Chicago teachers?

5. The city has options if it wants to stop the bleeding

The May 8 Illinois Supreme Court ruling disallowing modest pension reform, and opening the floodgates to further downgrades, has tied the city’s hands in many ways. Pension benefits have been granted a greater constitutional protection than funding for any essential government service.

That said, the city should immediately move to give all future employees a right to control their own retirements with 401(k)s. Current workers should be given the ability to opt out of a failing system.

At the state level, lawmakers should move to give Chicago the right to enter Chapter 9 bankruptcy proceedings. Only then, perhaps, will politicians and government-union bosses be forced to negotiate a realistic cure for their self-inflicted wounds.

Image source: phvolmer

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