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Chicago, Debt City

There’s a ton of noise about this city’s debt. Complaints about cut services, closed schools, new property taxes, debt ratings. It doesn’t help that some of the loudest voices have a stake in the argument and something to gain from skewing the truth.

If you cut through the noise and the emotions, what’s the reality facing Chicago?

When I went to get some facts, I came to two conclusions:

  1. The average Chicago taxpayer is getting screwed.
  2. The average Chicago taxpayer is going to get more screwed.

Chicago is 63 billion dollars in debt. That comes to 26,000 dollars per person.

If that doesn’t resonate with you, consider how Chicago ranks compared to other major U.S. cities:

[Source, Source, Source, Source]

That city debt is in addition to our sizable Illinois state debt. Our state debt amounts to about $25,000 per person, among the highest in the country. Here are the rankings for the top 5 most indebted states:

[Source]

Our city’s credit rating has sunk. The credit rating agency Moody’s, for example, dropped our city’s credit rating to “junk bond” status. That means our credit-worthiness is at rock bottom. If Chicago was a dude, he’d be denied a loan for a couch at the RoomPlace.

If that doesn’t hit home, consider that “Chicago is the ONLY major city to carry a junk bond rating from Moody’s.”

Consider how this affects your day to day life: The second biggest expenditure by the city of Chicago is paying down the huge and growing city debts.

Let me put that another way: Instead of using the taxpayer money for actual city services, it’s used to pay the growing interest payments on all the debts to the banks and bondholders.

So what’s the source of all the debt?

The real source of the debt is the LOAD of unfunded promises that the city’s politicians have made without backing them up. Namely, it’s the promises to pay city retirees their pension benefits. We are hugely in debt to a growing segment of people who no longer work for (or will eventually no longer work for) the city.

Let’s define a pension: A pension is a recurring and fixed payment given by an employer to an individual upon retirement and lasting through retirement. In many cases, an employee is responsible for paying a portion toward their pension during their work years. For Chicago city employees and teachers, it’s between 7–9%. The rest is Chicago’s responsibility. [Source: City]

In bygone days — let’s say your great-grandfather’s day — workers would retire at 60 and be dead by 70. That’s ten years of pension payments. Today’s workers ALSO retire at 60 but live well into their 80’s, pulling in pension payments for 20-plus years. [Source.]

Consequently, most companies and even government agencies have been phasing out pensions in favor of more employee-funded (or defined contribution) retirement plans, like the 401(k). In 1979, 62% of private workers had a pension, and 22% had some combination of pension and personal savings plan. By 2011, just 7% had a pension, and a lot of those work at old-school places like utility companies [Source.]

Have you ever met someone who works for the government who says something along these lines?

[Leaning back in their chair] “Yeah, I’ll just work ’til I’m 55, then retire to Florida and collect a nice pension.”

One person with that career path is kinda funny. Tens of thousands with that career path adds up to a serious fiscal crisis.

Here’s what the growth in city pensions actually looks like:

Here’s what our state’s pension health looks like, when you rank states’ pension liabilities out of their total revenue. Greece is going to starting to call itself the Illinois of the Mediterranean:

[Source]

Here’s where you say: “Come on, city workers [pick one: teachers, police officers, firefighters] work hard and OF COURSE deserve early retirement and a decent pension!”

Of course they do. They do within reason, or — put another way — within the taxpayer’s’ willingness to pay for it, though not necessarily within the politicians’ eagerness to sign off on it.

Consider this: Today’s city workers have retirement benefits that are worth about 2 million dollars at retirement. What number do you expect for your 401(k) the day you retire? Where are your retirement savings right now?

Or consider Chicago’s pension payments compared to those of other cities:

[Source / Source ]

In short, we’re in a huge fucking hole. Over the past decades, our leadership has doled out promises it had no way of funding.

Where do we go from here? Here are the big options:

  1. Break pension promises
  2. Cut spending drastically
  3. Raise taxes

1 Break the pension promises?

This would mean declaring bankruptcy, which cities cannot do under Illinois law. Beyond that, the Illinois State Constitution actually contains a provision that renders pensions untouchable. This provision was recently upheld in court. These pensions are legal contracts. Unless courts decide these contracts are invalid, we’re stuck with them.

2 Cut spending?

The problem is that, politically, this isn’t easy. Over time, spending creates entrenched interest groups. Those groups get very loud when their interests are threatened. Let’s say the city wants to cut spending across the board, from all city services. The newspaper headlines then declare, “City Cuts Elderly Services,” without providing any context whatsoever.

To take another scenario: Say the Chicago Public School system has a high school to which, over the years, fewer and fewer students enroll. Despite the loss in enrollment, the school keeps staff and teachers because it’s very difficult to lay off CPS employees on union contracts. The result is a school with fewer students but the same high expenses. Yet when the school district makes a management decision to close the school it’s seen as anti-education, anti-children, anti-union, etc. The status quo favors doing nothing and will go on strike to preserve itself.

The biggest entrenched interest group in Chicago is, of course, the unions.

About ninety percent of city employees are members of a union (according to the mayor’s office). You’ve got the Chicago Teachers Union (30,000 members), Firefighters (4,000), Police (8,000), among others.

Unions are the key groups exerting influence on our city and state leaders to extend benefits and special advantages to their members. That includes things like setting pay raises, negotiating on behalf of disciplined members — and, of course, fighting for generous pensions.

Unions influence politicians and exert legislative outcomes to their benefit by a few means: Endorsements; voter outreach efforts; protesting opponents; and campaign cash. Here’s a breakdown of spending by union political action committees on political party activities:

The unions are politically organized and motivated around core issues. The broad base of city taxpayers is not.

For hundreds and thousands of taxpayers, attempting to organize around a common issue is a classic collective action problem: Lots of people have a lot to gain from fighting back, but the cost of any given individual taking it on alone is too huge to be worth the effort.

3 Raise taxes?

This seems to be the biggest thing on the menu these days. Squeeze the taxpayer for more and more.

Today, Cook County has one of the highest sales tax rates in the country. As of the beginning of 2016, we will have THE highest sales tax rate in the country: 10.25% (Source) .

Why is there no more outrage about this? This is fucking ridiculous. Even someone with a big government slant should be outraged, given that sales tax is a REGRESSIVE tax that disproportionately burdens the poor:

  • If you make $10,000/month, you spend $100 on clothes and $10.25 to the city.
  • If you make $1,000/month, you spend $100 on clothes and $10.25 to the city.

Same amount for clothes, much different impact on your bottom line.

In fact, we have the HIGHEST tax burden in the country on those with income of $25,000 or below, which is a huge swath of the Chicago population, unfortunately.

What about the effect on business owners? The last time Cook County raised sales taxes to 10.25%, revenue did not increase proportionally. At that rate, more and more residents just went out of county or out of state to make big purchases. You can’t cut open the golden goose for golden eggs.

What else have the city’s leaders done to squeeze out of the taxpayer to feed the beast? One for the yuppies moving back to the city is the “cloud tax.” If you enjoy online services like Spotify, Netflix, Amazon Prime, HBO Now — i.e., anything that makes it nice to be inside between January and April in Chicago — then you’ll fucking need to pay the city 9% on top of whatever you pay. That’s the new normal.

I recognize that raising taxes is just one more way out of this huge fiscal crisis. But I am PISSED that the average taxpayer seems to be taking these new taxes with little more than a peep, when special interests cry and make headlines every time they’re asked to tighten the belt.

Then there’s the humongous, proposed property tax increase. Illinois, by the way, already has the highest property tax rates in the country. If you’ve got a home at or above a certain level ($250,000) you can expect to pay a lot more to the city. If you rent, well, your landlord very well may pass on the rise in property taxes to your ass. Your landlord probably didn’t get into the renting game because he liked to fish pubic hair from your shower drain.

I wouldn’t mind at all if our ever-higher taxes translated well to, say, upgrading the deteriorating city infrastructure. But as it is now, the taxes are going to pay down the debt on unfunded promises to people no longer working on our behalf.

Last words

If you’re an average taxpayer in Chicago, please don’t take these tax increases sitting down. Say something, speak your mind.

Tax increases need to be accompanied by pension reform! Without pension reform, we’ll keep going down the same black hole. All new city, school, park district employees should be on defined contribution plans, just like almost everyone else in our society, because that’s the sustainable and fiscally responsible path.

The fundamental goal of pension reform should be creating a retirement system for government, state, county employees that is more in line with market reality: namely, shared contributions rather than defined benefits, and higher retirement ages. Rule of thumb: If your government has a retirement plan that no sane actuary would touch with a ten-foot pole, then it’s time to get your retirement plan in line.

As long as the interest groups have their way and there’s no great protest from the taxpayers, city leaders will avoid necessary reforms and spending cuts and will squeeze as much as possible from the tax base. That’s the shitty thing about our political system. The coordinated, politically motivated interest groups tend to get their way at the expense of everyone else.

Average taxpayers just need to start speaking out. We are greater in number, and we can be louder. If you see something, say something.

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