Chicago had $41,100 in debt per taxpayer before COVID-19, second to New York
A new report from government finance watchdog Truth in Accounting gave the Windy City an “F” for financial health. Chicago’s massive $36 billion net debt stems primarily from pensions.
Chicago city taxpayers were just hit with $94 million in property tax increases and $38 million in higher fines and fees, including a policy for speed cameras to ticket drivers for going just 6 mph over the speed limit, to help close the city’s budget deficit. City leaders placed much of the blame on COVID-19’s impact on government revenues, but a recent report from fiscal watchdog Truth in Accounting shows Chicago’s problems existed long before the pandemic.
Chicago ranked next-to-last and was labeled a “sinkhole city” in Truth in Accounting’s latest report, “Financial State of the Cities.” The rankings of the nation’s 75 largest cities reflect financial data prior to the COVID-19 pandemic, showing how poorly positioned major cities such as Chicago were for a financial disaster.
The report found Chicago’s net debt – or the amount of money needed to pay its bills after accounting for everything the city owns – was $36.4 billion. That represents a per-taxpayer burden of $41,100, meaning each taxpayer would need to send that amount to the city in order for Chicago to eliminate its debt, earning the city an F for fiscal health. Chicago’s debt per taxpayer increased by $4,000 from the previous year and is 5.5 times the average burden of $7,355 per taxpayer across all 75 cities.
Only New York was in worse shape, with a whopping $68,200 taxpayer burden on $186.7 billion in net debt.
Collectively, the 75 cities had $333.5 billion in debt, a number expected to worsen without significant financial reforms.
Chicago’s financial woes stem largely from out-of-control pension promises. More than 68% of the city’s total debt burden stems from unfunded pension liabilities and nearly 2% comes from unfunded liabilities for retiree health insurance, meaning fully 70% of the city’s debt is related to retirement benefits.
Just five years ago Chicago passed its largest property tax increase in modern history, which then-Mayor Rahm Emanuel said would put pension funds on a “path to solvency.” The tax hike failed to stop rising pension debt.
Chicagoans continue to see their property taxes rise, with the latest $94 million increase containing $42.5 million to cover anticipated shortfalls in required pension funding. Even with the substantial property tax increases, Moody’s Investors Service in October changed the outlook for Chicago’s junk bond rating from stable to negative.
The city’s eight pension funds – including the four funds to which the city contributes directly and four funds for related entities funded by the same taxpayers – have accumulated nearly $45 billion in debt, more debt than 44 U.S. states. Those pensions are only 35% funded overall, meaning they have 35 cents saved for every $1 in future promises.
The fiscal realities created by those significant shortfalls and further tightening of available funding because of the pandemic’s impact should make clear the need for significant and necessary reforms.
The high cost and unsustainable nature of the city’s pension obligations has become a source of division among elected leaders. Chicago Mayor Lori Lightfoot recently opposed legislation advanced through the Illinois General Assembly which would double the cost-of-living adjustment for 2,200 city firefighter pensions from 1.5% to 3%. Lightfoot called the increase, which is estimated to cost the city $850 million by 2055, “irresponsible” because it will “pass on a massive, unfunded mandate to the taxpayers of Chicago.”
Few of Chicago’s leaders have publicly endorsed any specific reforms to stabilize the pensions and put them on a sustainable path forward. For her part, Lightfoot has called for change and often acknowledges the gravity of the pension problem but stops short of offering a specific reform plan. Near the end of his term, Emanuel endorsed the prospect of a constitutional amendment to rein in the pension problems plaguing Chicago and Illinois.
Because of a decision by the Illinois Supreme Court, substantive public pension reform for Illinois state and local governments are only possible with a constitutional amendment.
Calls for a pension amendment continue to grow louder in Illinois, but Gov. J.B. Pritzker has remained silent on the topic since incorrectly claiming in his budget address last year that an amendment is prohibited by the contracts clause in the U.S. Constitution.
Chicagoans should also know the city debt is not their only liability. Every Illinois taxpayer also owes $52,000to pay all the State of Illinois’ debts, Truth in Accounting reported in September. The $41,100 Chicago debt is on top of the state debt.
Pritzker recently said he is “thrilled” by the prospect of a Democrat-led U.S. Senate, as it points to an increased likelihood of a federal bailout of state and local governments. The current proposal would send $7.5 billion to Illinois and $5.7 billion to its local governments.
Regardless of whether federal aid will arrive to reduce immediate budget pressures for Illinois and Chicago, a constitutional amendment for pension reform is the only long-term remedy for Illinois’ and Chicago’s fiscal crises. The problems existed before the pandemic, and they will come back even stronger after a one-time federal bailout is exhausted.
Elected leaders in Chicago and Springfield owe it to taxpayers to use the time they gain from any windfalls to fix the pension problems now. Conducting business as usual and squandering bailouts will just mean pension debt grows, crowding out more public services and driving debt even higher.