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Chicago Confronts $35B Pension Crisis, Among Nation’s Worst

The city spends roughly $1 of every $5 on pensions while more than 80 percent of property tax dollars go towards retirement payouts. In November, the city had no junk ratings for the first time since 2015.

Mayor Brandon Johnson
Mayor Brandon Johnson listens during a City Council meeting Wednesday, May 24, 2023, at City Hall in Chicago.
(Brian Cassella/Chicago Tribune/TNS)
One of Brandon Johnson’s first moves as Chicago mayor was to buy himself time to address the city’s biggest financial problem: the more than $35 billion owed to its pension funds.

Just days after his May inauguration, Johnson persuaded state lawmakers to shelve legislation that would’ve added billions to the pension debt, while pledging to establish a working group to come up with solutions by October.

Now, the clock is ticking for the progressive Democrat to fix the worst pension crisis among major U.S. cities.

Just as Chicago reels from a spate of shootings and carjackings, inequities exacerbated by the pandemic and high-profile corporate departures, its pension gap creates a financial burden that threatens its recovery and the mayor’s agenda.

The situation makes for a cautionary tale for municipalities across the country facing long-neglected contributions and funding shortfalls. Already, the third-largest U.S. city spends roughly $1 of every $5 on pensions, while more than 80 percent of property-tax dollars go toward retirement payouts.

That presents a political vise for a mayor who notched a surprise victory by campaigning on promises that require more spending, including reopening mental health clinics and increasing funding for community-based public safety measures.

Next week, Johnson plans to hold town hall meetings with constituents to get their input for his first budget, which will have to take the pension predicament into account. A failure to shore up the pension system could have ripple effects beyond city limits: Illinois Gov. J.B. Pritzker said in an interview that he’s eager to help Chicago with this issue because it’s “the economic engine of the state.”

Competing Interests

Johnson’s working group, which held its first meeting in June, consists of city budget and finance officials, state legislators, union and labor representatives and outside pension experts. It doesn’t have any members from the business community, though the Chicagoland Chamber of Commerce wants to offer up ideas for consideration.

The pension group’s task is exceedingly complicated because of all the competing interests. Johnson, a former Chicago Teachers Union organizer, won office in part thanks to support from labor groups that might have varying priorities. Pension benefits are also protected by the state constitution. So, finding new revenue may be one of the only solutions.

During his campaign, he proposed a tax plan to generate about $800 million with new levies — including on big businesses, airlines and the ultra-rich — to address the structural deficit. Johnson’s transition committee wasn’t united behind these solutions, and support from state lawmakers is hardly a sure thing.

One obvious tactic, raising property taxes, would be a political lightning rod. Johnson pledged not to hike them during his campaign, and many Chicagoans are already frustrated by recent major increases in these levies.

But sticking to that campaign pledge could upset investors’ fragile faith in the city’s municipal bonds. In November, Moody’s Investors Service raised Chicago’s rating by one notch, an upgrade that meant the city had no junk ratings for the first time since 2015.

“It seems short-sighted to take property taxes, one of the city’s primary and stable revenue sources, off the table if continuing to address Chicago’s structural deficit is a priority,” said Molly Shellhorn, senior research analyst for municipals at Nuveen, the largest holder of Chicago debt. “Failing to raise property taxes for decades is one of the main reasons Chicago’s pension funding fell so behind in the first place.”

Meanwhile, securing new revenue streams to funnel more money to the pension system leaves Johnson with fewer levers to pull as he tries to find dollars for his key policy ideas — shoring up homeless services and violence prevention efforts, for example, or investing in youth employment.

“I am committed to protecting both the retirement security of working people, as well as the financial stability of our government so we can achieve our goal of investing in people and strengthening communities in every corner of the city,” Johnson said in a May statement.

Financial Drag

The annual payments toward Chicago’s four systems that pay benefits for retired firefighters, police officers, municipal office workers and laborers peaked this year at $2.6 billion, and are projected to total $2.4 billion in 2024.

Pension debt, in the most dire circumstances, has driven high-profile municipal bankruptcies such as those of Detroit and Stockton, California.

State law doesn’t allow Chicago to file bankruptcy. But alarms have sounded in recent years that indicate how bleak the situation is. In 2015, the state supreme court ruled against plans to curb costs, and Moody’s quickly cut its rating for the city to junk.

In 2022, for the first time, the city put in an actuarially calculated contribution for all four pensions funds – a step that helped it shed the junk rating.

Johnson’s predecessor, Lori Lightfoot, signed an executive order before leaving office that would funnel a projected $698 million surplus from 2022 and 2023 to chip away at the massive pension liability until revenue from the city’s first casino starts flowing in 2026.

The surpluses are likely to end soon, however, as the last of its federal aid from the American Rescue Plan Act runs out this year.

State Representative Kelly Burke, the chair of the Illinois House revenue and finance committee who is also a member of Johnson’s working group, acknowledged the scale of the challenge of figuring out how to pay for rising costs and boosting the funding levels of the four pension funds.

“It’s a heavy lift to get these on good fiscal footing,” Burke said in an interview. “It’s time to get creative.”

©2023 Bloomberg L.P. Distributed by Tribune Content Agency, LLC.
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