As Chicago works to remake itself into a global city, it confronts unprecedented challenges to its fiscal sustainability -- more serious even than the challenges faced by Detroit. Despite Chicago's gleaming towers, swank restaurants and smart shops, it is a deeply troubled place, its problems rooted in seemingly intractable finance issues that are quite different from those of many other large cities.
Foremost among Chicago's problems is its inability to obtain authority from the state to address its multiple, crushing public-pension liabilities: A disproportionate percentage of the city's budget must be devoted to long-term pension-borrowing obligations rather than to critical investments in its future. Mayor Rahm Emanuel's office warns that, if the state legislature fails to enact reforms, within four years the city's retirement contributions will amount to about $1.2 billion a year, up from $476 million last year. Chicagoans' long-term debt and other fiscal obligations per capita have risen 185 percent since 2002, driven in large part by the city's $20 billion unfunded-pension tab.
Detroit resolved some of its post-retirement health care and pension obligations as part of its plan of adjustment to exit from municipal bankruptcy. The Motor City also benefited from the constructive role that Gov. Rick Snyder and bipartisan state leaders took on to try to ensure its longer-term fiscal stability. In contrast, Chicago's fiscal sustainability seems trapped in seemingly intractable labor issues--issues for which help is unlikely to come from the state legislature.
The Windy City's debt numbers are just so steep and its long-term obligations are for so long that they have implications for property taxes. As the city is laser-focused on drawing in new businesses and young professionals and their families, any perception that property taxes might have to increase -- or that schools and crime rates will not improve--would be a serious blow to those aspirations.
There are some positive developments. Chicago, under Emanuel's unrelenting hammer, has created enterprise funds so that a greater and greater portion of city services are not financed through property taxes and the operating budget. This means that some 83 percent of the city's budget is now concentrated on schools and public safety. That's important: To be a world-class city, there is an urgent need to demonstrate not only world-class public infrastructure but also improvements in public safety and a competitive education environment.
The last thing Chicago needed was the kind of blow to its reputation -- and increased borrowing costs -- that result from a credit downgrade. Last week's downgrade by Moody's came at a most awkward time, in the midst of Emanuel's campaign for re-election (he faces an April 7 runoff against Cook County Commissioner Jesus "Chuy" Garcia).
Moody's decision means the Windy City now has a lower credit rating than all other major cities with the exception of Detroit. In their report, the Moody analysts wrote that their lowered rating "incorporates expected growth in Chicago's already highly elevated unfunded pension liabilities and continued growth in costs to service those liabilities, even if recent pension reforms proceed and are not overturned in legal appeal." There were some bright spots in the Moody's analysis, which took note of the city's still-strong economic base and Emanuel's achievement in structurally balancing the city's budget.
Still, as Laurence Msall, the prescient president of the Chicago Civic Federation, put it after the Moody's announcement: "Today's downgrade … is a wakeup call to anybody who's still asleep as to the city's deteriorating financial condition."
No one wants to see another situation like the one Detroit has been through, and Illinois law doesn't allow cities to file for federal municipal bankruptcy protection without legislative authorization. But if Chicago is going to be able to address the fiscal issues that threaten its global-city ambitions, more than a wakeup call is going to be needed.