Chicago's Slow Burning Financial Crisis

Give Mayor Emanuel some credit. He did more in one year to improve Chicago's city budget position than former mayor Richard Daley did in the previous decade and a half.

However, all Emanuel's tax/fee increases, layoffs and reorganizations of city departments have still left the city with a $369 million deficit in the 2013 budget.

The combination of city layoffs, merging the Chicago Police and Fire headquarters/office space, closing extra CPD district locations, switching garbage collection to a grid based system, creating competition in the recycling program and streamlining procurements have saved Chicagoans some serious cash.

City revenues for the main corporate fund were down but held up by increases in downtown parking fees, city water/sewer bills and hotel taxes combined with red light cameras issuing more speeding tickets and the city doing a better job of collecting fines. Those actions created more than $200 million in new revenue that helped offset reductions from other revenue sources like utility and telecom taxes.

Those tax increases hurt for many Chicagoan's, particularly drivers and homeowners. If you own a home in Chicago, not only did your property tax dramatically increase in 2012, but so to did your city water bill and your state income tax. Ouch.

The expense side is where the real trouble lies.

Chicago spends 20 cents out of every dollar on simply servicing its $20 billion debt load. For the last budget year, city residents paid about $738 million just to service the debt (that is excluding debt servicing for our airports). In the last 10 years, the city has issued $3.29 billion in new debt, and thus more money is needed each year to pay the interest and guarantees on those new loans. A half a billion of that new loan money was used for retroactive pay to police and fire salaries/pensions and another $600 million was used to pay up on settlements and judgements against the city.

About 75 cents out of every dollar spent in the city goes to cover personnel costs (salaries, health benefits, workers comp, overtime pay, unemployment comp, etc.) The city has 33,744 full time employees, which is nearly 10K fewer than 10 years ago.Yet despite the shrinking work force, the city's average cost per employee have ballooned to $96,082, largely because of increases in health care costs and salary growth.

89% of city employees are unionized with the largest chunk belonging to the Fraternal Order of Police and the Chicago Firefighters Union, both of which are engaged in collective bargaining negotiations with the city right now. The outcome of those negotiations will have a big impact on the city budget.

The city directly pays for many of the health care services it's employees receive. Those costs have risen to just under $400 million a year, an increase of $100 million in just 10 years.

Remember the Chicago Skyway deal? And those privatized parking meters? Only $623 million remains from the $2.98 billion paid to the city when it privatized both. The windfall was supposed to last for a century and replace the continuing income once generated by those assets. Not so much.

And then there are those pension funds.

The city operates 4 defined-benefit pension plans. None of them are fully funded. In fact, the Fireman's pension fund is only 26% funded and the police fund is only 33% funded. Overall, the city pensions are only 38% funded.

If those numbers are confusing, let me simplify it. Imagine you had to pay $3,000 a month to cover your rent, groceries, utilities, insurance and gasoline and you only had $1,140 a month in income. It's not a pretty picture.

In fact, the city's pensions for municipal workers and laborers will run out within 15 - 20 years in the absence of serious pensions reforms.

In summary, the city's pension funds are deeply underfunded, we continue to deal with 9 digit deficits in our annual budget as expenses rise and revenues fluctuate with the economy, we owe north of $20 billion to lenders and health care costs for employees will continue to rise with little reason to believe it will level off any time soon.

But that is not the worst part of this fiscal picture.

Every city in America is fighting the economic malaise, trying to reorganize it's employee compensation packages and prioritize city services. But not every city lost 200,000 people in the last 10 years.

The loss in population might be biggest challenge facing Chicago. The recession actually served to hold people in place as their home values plummeted and their incomes dried up. Prior to the crisis, populations trends were moving south fast for the city. There is reason to believe that an economic recovery combined with rising home values would actually serve to re-accelerate the rate of population loss from the city.

Population losses mean a loss of your tax base from which to draw revenue for the city. Vacant properties don't pay taxes. You can raise the taxes as high as you want on a shrinking population, but it won't do much good and gives those remaining just another reason to look for a more competitive place to live. Even now, the city lost some of its share of income tax revenue from the state government because it now contains fewer people.

Finally, Chicago does not exist in a vacuum. Our city is affected by the actions of Cook County, the State of Illinois and the country as a whole as well as global economic trends. We are all interconnected and for Chicago, the last few years have been very hard on our finances. We entered into the crisis years with poorly designed budgets and shaky funds, and the crisis exposed those weaknesses, making them worse.

Chicago faces competition from the entire world in its quest to recruit talent, youth, entrepreneurs, academics, artists and tourists. In order to compete on an even playing field, the city must get it's finances in good order or else become handicapped against its regional, national and global competitors. Mayor Emanuel has some time to push his proposed changes into budget law; but, not much. Local economists are pointing to the 2014-'15 period as absolutely critical. Beyond that budget year, things get dramatically worse for city finances under current law.

The financial clock is ticking on the Mayor and the Chicago City Council. Real leadership is required to fix city finances. We are about to find out if the current generation of city officials is up to the task. If not, the next generation of elected local officials will have a less bustling city to govern and unimaginable choices to face.

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  • Well, you laid out the problems concisely enough. So what's your plan to close the gap? With all of the revenue streams drying up or maxed out, where do you go next? Maybe its time that the County and State finally accept that gambling will add to the revenue without adding to the tax burden. The problem is, the me too groups that will demand their "fair share" of the tax windfall. Pensions don't vote so they get ignored. But we can't expect the men and women of CPD and CFD to risk their lives daily without benefits and pensions to rely after years of service to us all. So I ask again, what's you plane to close the gap?

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