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 New Chicago Mayor Lori Lightfoot gets no honeymoon. Instead,
she inherits daunting fiscal challenges without easy solutions.
Chicago’s structural budget deficit dates back to at least 2005. Outgoing Mayor
Rahm Emanuel’s administration announced the fiscal year 2020 gap could be as
high as $700 million, driven mostly by higher pension payments caused by poor
investment performance in 2018 among the city’s pension funds.
The pension pressure will continue during Lightfoot’s tenure: The city’s pension
funds require rapidly increasing contributions during the next four years.
Also, Chicago’s bond debt totaled $9.6 billion at the end of fiscal year 2017, a
57% increase in 10 years. Moody’s Investors Service assigned a junk bond rating
of Ba1 to that debt in July 2018.
Lightfoot should lead by putting the city on the path to fiscal stability –
without resorting to tax hikes on a city with a shrinking population that has
seen $864 million in tax hikes during Emanuel’s administration. Unfortunately,
she already is telling taxpayers to expect more pain.
Instead, Lightfoot should call for the Illinois General Assembly to take up
pension reform and should negotiate reasonable contracts that hold down the
city’s labor costs. With pension reform and restraint in spending and taxing,
the city could rebuild its finances, conserve money for basic services and keep
more residents from leaving the city.
Chicago’s structural budget deficit must be solved
Lightfoot is starting the budget process for 2020, which will be tough given the
city’s chronic structural deficit and skyrocketing pension costs.
Chicago’s structural budget deficit – caused by the city habitually spending
more than it collects in revenues – reached a high of $655 million in 2011 and
gradually came down to a projected $98 million for fiscal year 2019. That was
just the city’s day-to-day operating deficit for basic services. The gap was
projected to increase to $252 million in 2020, but that did not include an
additional $276 million contribution to police and fire pension funds. As the
Emanuel administration prepared to exit City Hall, they increased their estimate
of the 2020 budget deficit to as much as $700 million because the pension funds
suffered losses in 2018 rather than achieving the 7-percent investment target.
To cover the budget deficits in the past, the city has resorted to selling
assets and using reserve funds. According to the 2019 Budget Overview, the last
one prepared by the Emanuel administration, Chicago will have $8.9 billion –
revenues from taxes, fees and fines, but excluding grant money – to spend this
year.
These revenues will go to pay the city’s expenses. While personnel-related costs
are the highest, a combined 37% of the city’s budget, including all of the
city’s property tax revenues, will go to pensions and principal and interest
payments on Chicago’s debt.
The 2019 Budget Overview presents a balanced budget by making
assumptions that savings can be achieved in different ways, such as on equipment
cost reductions, government reform and better fiscal management. However,
experience shows the city consistently spends more than it receives regardless
of what the budget states.
According to Chicago’s Comprehensive Annual Financial Report, or CAFR, for 2017,
the most recent available, the city spent over $900 million more than its
revenues in 2017. Since 2011, the city’s net deficit – the amount by which the
city’s short- and long-term liabilities exceed its assets – has increased to
over $28 billion.
In 2011, the net deficit was only $2.6 billion. Despite claims
that the city has made progress by reducing the structural budget deficit since
2011, Chicago’s financial condition has deteriorated dramatically since then
because the city spends more than it receives, and its long-term liabilities
have grown because of higher pension obligations and debt.
Chicago taxpayers bear a high debt burden
Chicago taxpayers bear the highest total debt burden among the country’s 10
largest cities, an astounding $119,000 per taxpayer, according to Truth in
Accounting. The group counts the city’s pension and other direct debt, such as
general obligation bonds, as well as debt for other governmental units for which
Chicago taxpayers are responsible, such as Cook County and the state of
Illinois.
Of the governmental agencies in Chicago that are funded by taxpayer dollars, the
largest is Chicago Public Schools, or CPS. For its fiscal year ended June 30,
2018, CPS brought in a little over $6.5 billion in revenue and spent just under
$6.5 billion. CPS also took $2.9 billion in property taxes, more than twice what
Chicago receives from its property tax levy.
CPS has pension and debt challenges as well. Over 21 percent of what was spent
in fiscal 2018 went to pension and retirement benefits ($763 million) and debt
service ($651 million). The Chicago Teachers Pension Fund was only 48% funded
and had almost $12 billion in debt as of June 30, 2018.
A long-term plan for fiscal stability requires pension reform
Chicago’s budget problems can’t be solved without addressing the city’s pension
crisis. The four pension funds the city controls have over $27 billion in debt
and are only 26 percent funded. Lightfoot has suggested those figures may be
even worse. Those funds are the Municipal Employees’ Annuity and Benefit Fund,
the Laborers’ Annuity and Benefit Fund, the Policemen’s Annuity and Benefit Fund
and the Firemen’s Annuity and Benefit Fund. Required contributions to those
pension funds are set to increase dramatically. This threatens to overwhelm the
city’s budget and crowd out spending on critical city programs – without
stopping the growth in total pension debt.
In the first year of the Lightfoot administration, the required
pension contribution to the four city-controlled pension funds will increase by
$121 million over the fiscal year 2019 amount, to top $1.3 billion. The increase
in contributions will accelerate rapidly and reach over $2.1 billion in 2023, a
roughly $1 billion increase from just four years earlier.
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According to Chicago’s 2017 CAFR, pension payments
absorb most of Chicago’s property tax levy, with the balance going
to debt service. Property taxes were already increased by $543
million during the Emanuel administration. Nearly all of the $321
million in water and sewer tax increases and 911 fees passed since
2015 will go directly or indirectly to pensions as well.
That is why it is essential that Illinois pass a
constitutional amendment that protects earned pension benefits but
allows changes in future benefit accruals. As Emanuel did before
leaving office, Lightfoot should endorse an amendment to the
restrictive pension clause in the Illinois Constitution so the
growth in future pension obligations can be curtailed. Consolidating
Chicago’s pension funds with downstate funds could also generate
significant savings. Fund consolidation could take advantage of
economies of scale, eliminate duplicative administrative costs and
create greater investment opportunities, according to the Civic
Federation.
Lightfoot must negotiate labor contracts that Chicagoans can afford
As she faces a steep budget deficit, increasing required pension
contributions and a shrinking city population to pay for it all,
Lightfoot will need to hold firm in her negotiations on new
collective bargaining agreements with the city’s unions.
Between 2007 and 2017, the Fraternal Order of Police, the Coalition
of Unionized Public Employees, the Chicago Firefighters Union and
the American Federation of State, County and Municipal Employees
received salary increases between 21 and 26 percent. The city simply
does not have money for increases like those again.
Chicago has 44 union contracts, all of which expired in 2017.
Contracts with the 34 trade unions, which represent 22 percent of
the city’s workforce, have been renegotiated through the Coalition
of Unionized Public Employees. The new contracts granted 2.1 percent
annual pay increases, in line with economic realities, but did not
do away with costly work rules and prevailing wage requirements.
As Lightfoot negotiates with police and firefighters, which
represent 38.5 percent and 14.6 percent, respectively, of the city’s
workforce and a majority of its personnel expenses, she should heed
the advice of the Office of Inspector General, or OIG. The OIG
identified characteristics of the contracts that should be
reconsidered because they affect the city’s capacity to innovate and
modernize its operations to deliver services more efficiently and
transparently. These include:
“Side letters,” amendments outside of the contracts that create
ambiguity and undermine transparency. Some of these remain in effect
after a contract has expired and can prevent efficient contract
enforcement and administration. According to the OIG, there are 42
police and 51 firefighter side letters in their contracts.
A lack of adequate “reopener provisions” that would allow the city
to reopen contract negotiations in the event of a deterioration of
the city’s finances during an economic downturn.
“Duty availability pay” for which no specific purpose is stated in
contracts but is understood to compensate police and fire personnel
because they may be called to duty on their days off. Chicago paid
over $56 million in duty availability pay in 2016.
“Compensatory time buybacks” that permit police personnel to
accumulate up to 200 hours of compensatory time annually in lieu of
overtime during their careers and cash it in upon retirement.
Chicago paid out almost $19 million in compensatory time buybacks
between 2013 and 2017.
“Holiday on furlough days,” also known as “Daley Days,” that
consider fire personnel to have worked on a holiday if the holiday
occurs during a vacation.
Employees should bear more of their health care costs. Currently,
health insurance premiums paid by city employees are capped at
$2,228 annually regardless of salary. By contrast, the national
average for employees at private sector firms with more than 200
employees is $4,917.
The fiscal path for Lightfoot is difficult but achievable
There are no easy or quick solutions to Chicago’s fiscal problems.
It will take many years for the city to dig out from its pension and
other debt obligations. But Mayor Lightfoot must show the leadership
and courage necessary to take steps needed now to put the city on
the path to fiscal stability.
The first step must be advocating for a state constitutional
amendment to reform Chicago’s pension systems to protect earned
benefits while slowing the growth in new pension obligations.
However, even if an amendment to the pension clause is passed by the
General Assembly, it must be approved by Illinois voters in a
general election. The earliest this could happen is 2020. Lightfoot
need not wait for a full constitutional amendment to be passed to
achieve savings. While urging the state legislature to pass the
amendment, she could propose pension contributions based on new
post-reform benefit formulas. If the amendment fails, required
contributions would revert to those under the current formula.
As personnel-related expenses consume the largest portion of the
city’s budget, it is imperative that Lightfoot insist in upcoming
labor negotiations on pay raises that are in line with economic
reality and affordable for Chicago taxpayers. She should also
consider other ways to make city government more cost effective,
such as requiring employees to pay a greater share of their health
care costs and eliminating or limiting expensive provisions such as
compensatory time buy-backs.
The full results of some of Lightfoot’s efforts may not be felt
until after she leaves office, but she must resist the easy out of
hike taxes and avoid focusing on short-term results. She needs to
make tough choices and take the long view of the city’s fiscal
situation, or Chicago faces a dim future.
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