By Heather Gillers
CHICAGO -- Mayor Lori Lightfoot has been in office only five
months, but she is facing the prospect of having to ask a lot of
residents in the nation's third-largest city.
Chicago has the most pension debt of any major U.S. city, a
shrinking population and an $838 million budget gap -- and the
city's teachers have been striking since Thursday. At the same
time, Ms. Lightfoot, a former federal prosecutor, has eschewed some
of the nickel-and-dime approaches taken by many cities, ending
Chicago's practices of turning off residents' water for nonpayment
and suspending drivers' licenses for unpaid parking tickets.
Ms. Lightfoot will deliver her first budget to the city council
Wednesday. Her efforts to make the math work as Chicago's pension
payments increase rapidly will provide a window into the challenge
of addressing the burdensome legacy costs weighing on many older
"Cities that have pension challenges are facing the same sort of
question, which is 'How do you cover future liabilities and current
costs without driving people away with higher taxes?'" said Michael
Pagano, dean of the College of Urban Planning and Public Affairs at
the University of Illinois at Chicago.
Cities' net pension liabilities grew 76% in nominal dollars in
the five years ending in 2017, according to a study by Moody's
Investors Service of cities rated by that firm. The number of large
cities that have on hand less than half of the assets they need to
pay promised future benefits doubled between 2009 and 2015,
according to a study by the Pew Charitable Trusts.
Philadelphia, Providence, R.I., and Fort Worth, Texas, are all
in that situation, as is Chicago, according to 2018 data from
Merritt Research Services.
The reasons: Amounts owed to workers and retirees for pensions
have lagged behind the assets on hand to pay them. Losses in 2009,
plus years of falling short of investment targets, left pension
funds with far less than projected, while governments have also
contributed to the shortfall by skimping on annual pension
contributions to balance budgets. Court protections in many states
have made it difficult to cut benefits for already hired
Rising costs for pensions and other expenses "have become a new
normal since the recession," said Mary Murphy, project director at
the Pew Charitable Trusts.
In an effort to shore up Chicago's finances, former Mayor Rahm
Emanuel, a former congressman and White House chief of staff who
served eight years, raised property taxes and also helped attract
new investment and construction to the city's downtown. But decades
of paltry contributions to the city's four pension funds have left
Chicago $30 billion short of what it needs by the city's own
estimates. The city has the largest pension liability of any major
city, according to Moody's.
"The pressure is building on Chicago," said Laurence Msall,
president of the Civic Federation.
Now the city's pension cost jumps each year, and Ms. Lightfoot
must find $1.7 billion for pensions, up from $1.3 billion last
year, according to the city's 2020 budget forecast. Total spending
by the corporate fund, which generally pays the city's operating
costs including pensions, is $3.8 billion this year.
"There's no more road to kick the can down," Ms. Lightfoot told
attendees at the Chicago Investors Conference last month.
Ms. Lightfoot must also contend with the teachers' strike, going
on since Thursday over pay, class size and other issues.
The school district, which is run by a mayor-appointed board,
sets its own budget and levies property taxes that are in addition
to the taxes levied by the city on the same properties, and are
subject to a state cap. Ms. Lightfoot has more latitude to raise
property taxes and has made clear she may do so.
Two strategies touted by Ms. Lightfoot -- additional taxes on
real-estate sales and a casino in Chicago -- will likely require
cooperation from state lawmakers. Ms. Lightfoot's administration
has also talked about plans to go after businesses delinquent on
their taxes, to add ride-share and restaurant taxes, and to
refinance city debt at lower interest rates. Along with pensions,
Chicago also faces escalating bond payments.
The city's finance chief said Monday that 40% of the budget gap
will be filled by one-time revenues and 60% will be structural
solutions such as recurring revenues or lasting cuts. She said the
city plans to save $200 million next year by refinancing existing
debt. A spokeswoman said Ms. Lightfoot isn't currently considering
shoring up the city pension fund with borrowed money, a possibility
contemplated by Mr. Emanuel.
Ms. Lightfoot will also forego an expected $15 million in
revenues, following through on a campaign promise to offer relief
to residents burdened by parking fines and fees. Ms. Lightfoot has
said that she expects the city to recoup some of the revenues as
residents take advantage of new installment plans. The initiative
has won kudos from residents but attendees at the Chicago Investors
Conference were underwhelmed.
"Most of the investors don't live there," said Howard Cure,
director of municipal bond research at New York City-based Evercore
Wealth Management, which holds some Chicago debt. "They're just
looking at 'How best can they pay their debt service and balance
Write to Heather Gillers at firstname.lastname@example.org
(END) Dow Jones Newswires
October 22, 2019 11:04 ET (15:04 GMT)
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