Chicago’s dire finances highlight the city’s union problem

About a year ago, the city of Chicago released its 2012 Annual Financial Analysis. Back then I noted that many of the city’s challenges, especially high employee costs and growing pension debt, were aggravated by a heavily unionized workforce. With a new year comes newer, more disturbing financial figures – and the same old union problem...

About a year ago, the city of Chicago released its 2012 Annual Financial Analysis. Back then I noted that many of the city’s challenges, especially high employee costs and growing pension debt, were aggravated by a heavily unionized workforce. With a new year comes newer, more disturbing financial figures – and the same old union problem is still there.

Mayor Rahm Emanuel’s financial team estimates that personnel costs make up 78 percent of government expenditures. Base wages alone are about two-thirds of all government spending, and health care makes up another 9 percent. With wages and benefits making up such a huge part of the budget, seemingly small changes can have a big effect.

And there certainly have been changes. Aside from police and fire, most city workers saw their pay go up by 16 percent over the same period between 2005 and 2012. All of that has a noticeable effect on the cost of government: Chicago cut its workforce by about a fifth between 2003 and 2012, but total personnel costs went up by 15 percent.

The city still has serious trouble with its pension funds as well. In total, its four main pension funds have only about 36 percent of the assets they should have to cover the benefits they are expected to pay out. The police and fire pensions are in especially bad shape, with funding levels at 31 percent and 25 percent, respectively.

Chicago has just one more year to go before pension costs shoot through the roof. In 2015 the city’s police and fire pensions must start on a schedule that will have them 90 percent funded by 2040. This will add almost $600 million every year to the city’s pension costs, with no reductions in sight. Out of a total operational budget of just more than $3 billion, that chunk is going to smart.

Nine out of 10 city employees are unionized, so getting a handle on labor costs will mean negotiating tighter contracts with unions that have shown little concern for the city’s finances. And government unions – including the ones based in Chicago – have been adamant about resisting all but the smallest of pension reform proposals.

All of this comes on top of a dramatic triple downgrade in the rating for bonds issued by city government, which means the city will have to pay more in interest to borrow money.

Union demands have put the Chicago in a bind, and the city’s fiscal situation is likely to get much worse soon – and stay that way for many years. If Chicago is to find a way out of its predicament, one of two things is going to have to happen: either government union bosses are going to have to completely reverse course and agree to major concessions on wages and pensions, or their ability to block needed changes will have to be taken from them.