A Most Serious Fiscal Challenge. Chicago Mayor Rahm Emanuel yesterday called on the Windy City’s 50 aldermen to summon the courage to pass the largest property tax increase in modern Chicago history: he told them they could justify such a hard vote by ensuring their voters understood the alternative: the dismissal of one out of five police officers, the closure of half the city’s fire stations, the elimination of the city’s rodent (read rats) control program, and the reduction of trash services to only twice a month—or, as he put it: “Our city would become unlivable…That would be totally unacceptable.” His proposed budget will total $9.3 billion when corporate, enterprise, and grant funds are added up, including a $3.6 billion general fund formally known as the corporate fund—up from $9.2 billion and $3.5 billion, respectively, for FY2015. In his budget address, Mayor Emanuel, in his second-term, laid out a grim assessment should the Council fail to act: “Our greatest financial challenge today is the exploding cost of our unpaid pensions. It is a big dark cloud that hangs over the rest of our city’s finances…Now the bill has come due,” referring to a mandate which will take effect next year to stabilize police and fire funds across Illinois: Chicago must pay the two public pension funds $550 million more as it moves to an actuarially required contribution—and, that is assuming positive action on state legislation to trim next year’s increase to $328 million. Even though his proposed budget includes some cuts and reform measures, the Mayor told his colleagues yesterday that the debt burden is so ponderous that the city cannot cut its way out of the crisis—cuts, he warned, which would require the loss of 2,500 police officers, the closure of 48 fire stations, and laying off 2,000 firefighters: “Our city would become unlivable.”
Chicago, after a significant effort to remake itself into a global city today confronts unprecedented challenges. Challenges facing the city’s fiscal future include: schools, which one commentator cited as “almost insoluble;” police—crime—gangs (also “almost insoluble”); infrastructure (on which Mayor Emanuel has earned very high marks); pensions, where Chicagoans’ long-term debt and pension obligations per capita have risen nearly 200% since 2002—and which are inextricably linked to the state; and bringing jobs back to Chicago—fiscal sustainability challenges exacerbated by the state dysfunction, by the Illinois constitution’s and Supreme Court’s rejection of efforts to modify public pension obligations, and as state and federal aid have been reduced. The Windy City, the third most populous city in the U.S. with 2.7 million residents, was a time bomb waiting to happen from the very moment Mayor Emanuel took office—an office in which he immediately confronted not only a $635 million operating deficit, but also a city which had experienced an exodus of 200,000 in the previous decade—and some 7.1% of its jobs. Now, revenues are coming back, but the city faces an exceptional challenge in trying to shape its future. By FY2014, Chicago had a debt level of $63,525 per capita, leading one expert to note that if one included the debt per capita with the unfunded liability per capita, the city would be a prime “candidate for fiscal distress.” Nevertheless, since his election, unemployment has been coming down, and census data demonstrated the city is returning as a destination for the key demographic group, the 25-29 age group, which grew from 227,000 in 2006 to 274,000 by end of 2011. Nevertheless, the city’s unrelenting pension liabilities and what Moody’s has termed it “unrelenting public safety demands” have left the city, increasingly, between a rock and hard place. Now Chicago, which has one of the largest city councils in the U.S., faces a momentous challenge to its future—a fiscal challenge, and, with his announcement, now a political challenge, or, as the Mayor put it yesterday: “I know this budget’s tough, and therefore I know it carries political risk. I get it…But there’s a choice to be made, make no mistake about it. Either we muster the political courage to deal with the mounting challenges we inherited, or we repeat the same practices and allow the financial challenges to grow.”
Now, in a vote unlike in other U.S. city, the mayor is asking the aldermen on the city council to put their own jobs on the line. Mayhap more daunting, should even modest public pension legislation pending in the stalemated Illinois legislature not be enacted, the Mayor’s proposed, record property tax increase would be more than $200 million short of the requisite level to meet Chicago’s public pension obligations. Under the Mayor’s proposed budget, property taxes would be increased $543 million over the next four years, beginning with a jolting $318 million next year; a separate $45 million property tax hike would go toward construction projects at Chicago Public Schools to alleviate overcrowding in some neighborhoods. In his proposal to the Council, Mayor Emanuel makes clear he has asked for an expanded homeowners’ exemption from Gov. Bruce Rauner and the legislature for Chicago homeowners who own and live in a home worth $250,000 or less. But the massive property tax increase alone comes at a time when Gov. Rauner is seeking a statewide property tax freeze. In his proposed budget, Mayor Emanuel also proposed new fees on taxi and ride-sharing services, such as Uber and Lyft, which would generate $48.6 million per year and a tax on electronic cigarettes which would reap another $1 million. Mayor Emanuel told the Council his budget includes $170 million in cuts and efficiencies; however, he has yet to release the fine print on what those reductions are. In asking for the unaskable, Mayor Emanuel, speaking from the City Council dais to his fellow elected leaders, said: “With this budget, we can be remembered for stepping up to the challenge rather than stepping aside. With this budget, we will be counted among the doers rather than among those who dithered…With this budget, when we look back at our public service, our individual names will be in the history book rather than the guest book. We owe it to our city and to the generations who come after us to do what is right — even when it is hard.”
The Civic Federation of Chicago defined the city’s problem concisely: “There’s no question that the mayor will need to ask taxpayers to pay more while they receive fewer services. Decades of ignoring fiscal reality have led us to this crisis: a pension system on the brink of disaster, an enormous debt burden, below-investment-grade credit. Most critically, Chicago Public Schools may not have the money to stay open for the entire school year….the question… will be whether the mayor’s budget provides enough certainty to residents and businesses that their investments will lead us beyond the morale-killing status quo to a more stable and vibrant city. A possible $500 million increase to the city’s property tax levy would be the largest tax increase in Chicago history, yet it would be only a first step. Chicago and its school system will need to make more difficult choices to close structural deficits and pay down nearly $30 billion in unfunded pension liabilities…We have to start to spend within our means — no more “scoop and toss” or borrowing for operating expenses. It would be irresponsible to raise taxes unless the city commits to significant cost reductions and efficiencies. Areas that have been considered untouchable should be reviewed, such as staffing for police and fire, the size of the City Council and the aldermanic menu program. Even with a tax increase, many services will have to be reduced or eliminated.
“Taxpayers will need answers to longer-range questions. How will the choices in this year’s budget impact future debt and taxation levels? How long before the city’s debt burden is reduced to a more manageable level? How does this budget take into account what will be asked of taxpayers to stabilize Chicago Public Schools, Cook County and the state of Illinois?
“Many of Chicago’s fiscal problems are embedded in state law. Any comprehensive solutions will require action from Springfield. State lawmakers should extend the sales tax to certain services, increase revenue sharing with local governments, merge the Chicago Teachers’ Pension Fund with the Illinois Teachers’ Retirement System and consolidate police and fire pension funds throughout the state.
“We cannot change the poor financial decisions that brought us to this crisis. With all that Chicago has to offer, however, we should make the sacrifices necessary to set the city on a more stable fiscal path. Leaders in Chicago and Springfield just need to give taxpayers the confidence that their sacrifice will pay off.”