Chicago is in serious financial trouble, with hundreds of millions of dollars due on a pension debt of more than $20 billion. The city’s school district also faces a deficit of a billion dollars or more.
The troubles have prompted bond-rating agency Moody’s to downgrade the credit ratings for the city, the school district and the park district to junk status — giving Chicago the worst credit rating of any big city after Detroit.
In our third biggest city, how does that even happen?
As a Chicago native, I know it’s bad, but the idea that Chicago invites serious comparisons with Detroit is surprising. For an outsider’s perspective, I call Todd Ely, who teaches public finance at the University of Colorado.
“As an academic — and one who goes to conferences on exciting things like budgeting and financial management,” Ely says, “whenever the folks from Illinois stand up to talk, everybody kind of looks and says, ‘Soooo, tell us what’s happening now…’”
A local expert confirms Ely’s judgment that even in a moment when state and local finances seem under pressure everywhere, Chicago and Illinois look especially bad.
Ralph Martire, who runs the Center for Tax and Budget Accountability, a local policy group, responds with a sigh when I ask, “are we really the worst?”
“Yeah, kind of we are,” Martire says. “Our debt per capita is really some of the highest in the nation.”
The reason will sound familiar. We owe our pension plans, like a lot of other places, but more. We skipped payments — a lot of them, more than most. We said we’d pay it back eventually, and, as Martire says, “This is eventually.”
Chicago faces an additional obstacle to digging itself out: the Illinois constitution. Ours, unlike most, explicitly forbids reneging on pension benefits. The state supreme court issued a stern reminder to that effect on May 8, in a ruling that put a damper on plans to address the problem by cutting benefits.
The ruling triggered the downgrade from Moody’s — the downgrade itself also threatens to be expensive for the city, triggering higher interest rates when we borrow money, and possibly some penalties.
“We really don’t know what the fiscal impact will be,” Martire says, “but it’s not going to be insignificant.”
The problem can’t be fixed simply by cutting wasteful spending, he says. Not that waste and abuse aren’t a problem here — they are — but overall spending isn’t lavish.
“You look at the city of Chicago, spending’s been cut,” Martire says. “You look at the state of Illinois, spending’s really been cut. We’re one of the lowest-spending states in the nation, across the board, despite having the fifth-largest population.”
To see what below-average spending looks like, I went to visit another set of local experts: Erika Wozniak, a fifth-grade teacher, and her students at Oriole Park Elementary School on Chicago’s Northwest Side. On the morning of my visit, the students discussed how a financial meltdown for Chicago’s public schools — called “CPS” by locals — would affect them.
“If CPS went bankrupted, the classrooms would be too small to fit the students,” said one student. “And if you ever had a question for the teacher, you wouldn’t be able to get to the question, because there’d be too many kids in the classroom.”
“And how many students do we have in our classroom?” Ms. Wozniak asked the class.
There are no desks in the classroom. Instead, the students crowd around tables, with a crate of books and supplies beside each child’s feet.
However, Ralph Martire has a proposal to sort this out. “It’s not rocket science,” he says. “It’s something we call ‘math.’”
It also involves something politicians find distasteful: raising taxes. Economically, this is something Chicago could probably do.
“Chicago is a regional, national, and global hub,” says William Glasgall, who watches state and local finance for the Volcker Alliance. “It’s an information-based economy. The financial-services industry in Chicago is large and powerful.”
In other words, unlike other cities with big problems — say, Detroit — Chicago has a tax base. And compared to New York or California, taxes here are relatively low.
It is true that compared to neighboring states like Indiana or Kentucky, they’re on the high side. However, Glasgall says, taxes are not necessarily the only reason businesses choose locations. “Are all those financial services firms really going to move to Wisconsin?”
In terms of its tax base, Chicago might do itself more damage by failing to raise taxes, says Todd Ely, the public-finance scholar. He says he’s been wondering, “Would entrepreneurs choose Chicago as a place to start a business right now?”
“Personally I wouldn’t,” Ely says. “Even though I think it’s a great city.”
Not, he says, because taxes are too high. But because all the chaos — under-funded services, fiscal uncertainty — is bad for business.
“When do you start having businesses leave,” he asks, “that are concerned about the schools? That are worried about — I mean, uncertainty’s bad for business.”
At least one of the kids at Oriole Park has the same idea.
“If CPS goes bankrupt, then I’ll end up going to a different CPS,” says one boy. “California public schools.”
So, that’s one family ready to vote with their feet … for higher taxes.