Tejasvin Prabhakar

Current Event Summary #1

18 January, 2025
Summary: Due to decades of poor management, Chicago is currently experiencing a serious financial
crisis, especially with regard to debt and unmet retirement benefits. Mayor Brandon Johnson's
planned $300 million property tax raise was rejected, and the city barely passed a reduced budget,
leaving a $982 million budget imbalance. Chicago's 2022 budget was dominated by debt and
retirement benefits, accounting for 43% of the total, more than police and infrastructure spending.

$35 billion in pensions, $2 billion in retiree health benefits, $14 billion in teacher debt, and $29 billion
in mortgage debt are among the city's unfunded liabilities. Since Chicago is not permitted by Illinois
law to file for bankruptcy, there are warning indications of possible insolvency.
Relevance:
My Opinion:
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Title: What's The Matter With Chicago?
Full Text: The word bankruptcy has been hanging over Chicago like a storm cloud about to burst.
Mayor Brandon Johnson is the latest leader to attempt to close Chicago's gaping fiscal gap: He
proposed a $300 million property tax increase to partly fill Chicago's $982 million projected budget
deficit, only to have it be unanimously rejected by the City Council. The Council narrowly passed a
budget on Dec. 16, with far less in tax increases than the mayor had initially demanded.
The Windy City's woes are the product of decades of fiscal profligacy and a cautionary tale to
policymakers in every region and at every level of government: Retirement benefits are like free junk
food to politicians -- everyone loves them, and the bills don't arrive until later. They can be ruinous
for a city's long-term fiscal health.
At the heart of Chicago's deficit are decades of increasingly generous retirement benefits offered
by Chicago's leaders to more than 30,000 public employees, a politically powerful constituency.
Today, a city employee retiring after 35 years with a final salary of $75,000 would receive combined
pension and retiree health benefits of about $77,000.
The city government has failed to fund those pension promises fully and the bill has come due.
Retirement benefits and debt service together made up 43 percent of Chicago's budget in 2022, the
highest rate of any U.S. city. Chicago spends more on debt and pensions than it does on the police and
infrastructure, according to an analysis from the Illinois Policy Institute, a libertarian-leaning policy
group. In other words, Chicago is paying for the past, not investing for the future.
Chicago's pension actuary warned in a letter to the plan's leadership last year and again this year that
''the fund is still at risk of potential insolvency if an economic recession or investment market
downturn were to occur in the near term.'' (He wrote it in boldface to get policymakers to take notice.)
Chicago owes bondholders almost $29 billion. It also faces $35 billion in unfunded pension liabilities
and almost $2 billion in unfunded retiree health benefits. And these figures do not include an
additional $14 billion in unfunded benefits owed to Chicago's teachers. The watchdog group Truth in
Accounting gives Chicago a grade of F for fiscal responsibility, ranking it 74 out of 75 cities. (New
York City is last.)
City leaders may continue to ignore these warnings. If the pension fund does get close to
insolvency, Chicago can most likely keep the pension checks flowing by suspending payments to
bondholders. Illinois has no legal provision for Chicago to declare bankruptcy, meaning the state
would be forced to rush legislation into place to prevent financial chaos.
Judging by the experience of places such as Detroit and Puerto Rico, where I serve on a federally
appointed board overseeing the island government's bankruptcy, pensions would largely be protected
in the event of fiscal chaos, followed by core government operations. Nonessential government
services would be reduced, and bondholders would receive what remains.
Even if Chicago can contain the political fallout locally, the economic impact would reach far beyond
the city limits. Chicago is the largest city in the Midwest and the third largest nationwide. The state of
Illinois, which faces vast debts of its own, is not in a position to bail out its largest city, so Congress
or the Federal Reserve might have to step in to help.
Policymakers in other big American cities ought to be paying attention. Truth in Accounting gave San
Francisco a fiscal grade of D, while New York's largest-in-the-nation debt burden of $61,800 per
taxpayer caused it to share a failing grade with Chicago. New York and San Francisco each already
devote more than 22 percent of their total budgets to retirement benefits and debt.
One reason it's easy to allow pension-fueled deficits to keep growing is that there are very few
guardrails. State and local government pensions are unregulated by the federal government, so they
operate with much lower funding standards than federal government pensions or those offered by
private companies.
As with private pensions, state and local governments should be required to assume conservative
returns on pension investments and to address unfunded liabilities quickly, rather than letting funding
shortfalls fester over decades.
If, as in Chicago, decades of fiscal recklessness are allowed to go unchecked, changing course can be
extremely painful. Chicago has increased its pension contributions significantly. But the city must pay
for its $927 million in additional pension contributions by reducing other essential government
functions.
The consequence is a lower level of public services for everyone. With the city police force down by
over 1,600 officers since 2018, the city's inspector general found that 49 percent of 911 calls appear to
go unanswered. Chicago is already seeing the effects of this deterioration. Companies such as Boeing,
United Airlines, Tyson Foods and the hedge fund Citadel have all moved operations away
from Chicago in recent years, citing the business environment, public safety and governance quality
among their reasons.
These departures were one reason the city's population fell by more than 200,000 residents over the
past two decades, leaving it at the lowest level since 1920, shrinking the city's tax base. They also
altered the city's political dynamics, as the businesses and individuals that left were precisely those
that might have pushed for change. In 2023, Chicago elected as mayor Mr. Johnson, a progressive
county commissioner with strong ties to the city's teacher unions. While he has worked to close the
budget deficit, his political base expects him to be a protector of the status quo rather than a reformer.
There may be no way for Mr. Johnson to get Chicago out of its fiscal mess without political and
economic pain. But he, and the rest of America's big city mayors, have an obligation to try.
Andrew G Biggs is a senior fellow at the American Enterprise Institute. Since 2016, he has served as
a presidentially appointed member of the Financial Oversight and Management Board for Puerto
Rico, which has overseen the Puerto Rico government's bankruptcy.
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