Chicago's Death Spiral: There's No Can Left to Kick

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Chicago Mayor Lori Lightfoot has presented her plan of tax hikes and can kicking. It can't possibly work.

This is a guest post from Wirepoints regarding the serious trouble Chicago is in, and the Mayor's refusal to do anything about the situation.

Lightfoot’s Budget Won’t Arrest Chicago’s Downward Spiral

By: Ted Dabrowski and John Klingner

Chicago Mayor Lori Lightfoot has presented her plan to cover an $838 million budget shortfall for fiscal year 2020. Like her predecessors, she’s chosen to focus on plugging a one-year budget deficit largely with a one-off deal and a number of tax hikes. And also like her predecessors, she’s failed to attack the real sources of Chicago’s slide toward insolvency.

To close the city’s deficit, Lightfoot expects $200 million to come from up-fronting 20 years of savings from a bond refinancing deal that will partially securitize $1.3 billion of debt. The savings will be a one-time event – even though the mayor originally promised not to use one-time sources – leaving a $200 million hole in budgets after 2020.

The mayor proposes to save another $337 million through various efficiencies, including the implementation of zero-based budgeting, department mergers, better debt and tax collection, and various other financial improvements.

Lightfoot wants the remaining $350 million deficit to be paid through new taxes. Her plan calls for higher taxes on ridesharing and restaurant food and drink, all which will put even more pressure on consumers. She’s also called for other revenues, including a progressive real estate transfer tax and a Chicago casino, that need the authorization of Springfield. If the mayor doesn’t get those items, she’s threatened to close the remaining deficit with a property tax hike.

Those property tax increases would follow Emanuels’ tax hikes of $860 million, which included a record-breaking $543 million property tax hike and numerous increases on garbage collection, ride sharing, online entertainment, e-cigarettes, utilities, permits and more.

What’s missing

Missing from the mayor’s speech was a call for a pension amendment and collective bargaining reforms – the reforms needed to help her cut the city’s massive pension debts and to bring tax relief to city residents. Instead, her only request of Springfield was permission to hike taxes even more.

Without structural changes, Lightfoot will face budget challenges year after year and the city will deteriorate more rapidly. Additional pension costs alone – Chicago will need another $600 million annually by 2023 – will force her to hike taxes by hundreds of millions more over the next few years. And if a recession hits during her term, the city’s financial crisis will deepen

Even if Lightfoot succeeds in implementing her plan, the budget won’t be balanced. Official numbers consistently fail to properly account for the city’s true costs, including those of pensions. That’s why the city runs up massive debts every year despite City Hall’s claims of “balanced” budgets. Fitch Ratings agrees. The firm “will not consider the city’s budget to be structurally balanced until recurring revenues match recurring expenses (including actuarial funding of pension contributions).”

That failure to structurally balance the city’s finances is why the city’s net position has worsened by billions. Chicago’s net position now stands nearly $30 billion in the red, while the CPS sits at negative $14 billion.

The reality is this: Chicago is trapped in a vicious spiral.

  1. The city and school district are already junk rated by Moody’s
  2. Chicagoans are on the hook for more public sector debts than any other major city in the country
  3. Taxes already rose by record amounts under Mayor Rahm Emanuel. And real home values are falling, bucking the upward trend in the biggest cities across the country
  4. All those problems are contributing to Chicagoans’ flight.
  5. And as the city’s population shrinks, the burden will only get bigger on those who remain.
  6. The mayor’s budget plan doesn’t change the negative trajectory of the city. In fact, it keeps in place every structural problem that’s brought the city to this point. Expect things to only get worse.

A historical burden to address

Lightfoot is focused on closing the $838 million gap, but the real problem she should focus on is the massive overlapping retirement debts Chicago households are on the hook for. 

Chicagoans face some $90 billion in official overlapping city, county and state retirement debts. But under Moody’s more realistic pension assumptions, those overlapping debts total nearly $150 billion . 

Spread that debt over the Chicago households with the means to pay – say those making more than $75,000 a year – and it’s nearly $400,000 per household, a hidden mortgage that will eventually chase many families out of Chicago.

Unfortunately, Lightfoot has already moved in the wrong direction. She’s made the household burden worse by offering Chicago teachers what she calls “the most lucrative CTU package in its history.”

If Lightfoot really wants to be historical and address the problems that her predecessors have ignored for decades, she’ll need to change her approach. She needs a workout plan – a restructuring of sorts – that reduces overlapping pension debts, aligns the city’s public sector infrastructure with what its residents can afford and reforms collective bargaining laws to give taxpayers a stronger voice.

She’ll need to be the champion of those reforms in Springfield. All of them are needed to make Chicago – and cities across the state – competitive again in tax burdens, public services and economic confidence. 

Mish Comment

It is simply too late, and Chicago too deep in debt to fix other than bankruptcy.

Alas, the state does not allow bankruptcy.

So Lightfoot, like all the mayors who proceeded her will attempt another can-kicking exercise.

Alas, there is no can left to kick.

This is why I suggest Escape Illinois: Get The Hell Out Now, We Are

Mike "Mish" Shedlock

Comments (39)
No. 1-18
leicestersq
leicestersq

In the UK, there is this important point that when it comes to the House of Parliament, that it is not bound even unto its previous laws/agreements.

The importance of this principle cannot be understated. If a state gets into a bankruptcy situation, it cannot solve that by allowing a court to sort it all out, as there would most likely be many court cases and no court could ever pare down the obligations of an entire state (state as in US State or other Sovereign nation) in a manner satisfactory to all of the people affected. Only the Parliament or legislative body can do this. And it must have the power to do it of course.

The inability of Illinois to pare down its own liabilities is therefore utterly baffling. I hope that it doesnt reconsider this, because it will be interesting to see what happens when the state cant pay, but the law says that it cant pare down the liability. That will be a fun moment.

Duncan Burns
Duncan Burns

The fraud known as Elizabeth Warren was there this week to support the teachers. Funny they didn't mention any of this.

Onni4me
Onni4me

No wonder some people go off-grid into the deep forest. Looking at these numbers the Chigatanic is about to hit the iceberg.

KidHorn
KidHorn

They'll be bailed out, but not until the subsistence of the population is in jeopardy. Democrats specialize in providing minimum sustenance to their constituency. Just enough to get their votes.

ksdude69
ksdude69

Ive had it with property taxes. They'll have everyone on skid row at this rate. Then send collectors to the homeless camps.

awc13
awc13

imagine if harris were to become president, she would increase chicago teacher pay even more

RonJ
RonJ

"What’s missing"

The ability of the tax payers to afford their own city government.

The tax payers need to form a union just like the school teachers have and go on strike against the city, just like the school teacher have.

abend237-04
abend237-04

Ultimately, all costs are variable. Chicago politicians will learn this in bankruptcy, as Detroit did. In 2016, pundits like Mish were declaring Chicago's $25 billion kicked can a disaster in waiting. Three years later, it's approaching $30 billion and her only remaining growth industry is taxpayer emigration. Some can; some leaders.

jivefive99
jivefive99

Mish, every downer story on Illinois and Chicago etc are written by the same organizations over and over (Wirepoints and that other downstate operation). I dont suppose finding someone on the other side occasionally might not be a more balanced way to look at these problems?

jivefive99
jivefive99

Because, you see, the majority of the money we dont have is needed for police & fire dept retirees (80% of pay pensions & free health care), who are as you know American heroes and therefore untouchable in every possible way. Perhaps another point of view might mention this little fact ....

Jackula
Jackula

When the next recession hits you can stick a fork in em. Plenty others here in California as well.

numike
numike

Release #2019-08: Leaving California: Half of State’s Voters Have Been Considering This; Republicans and Conservatives Three Times as likely as Democrats and Liberals to be Giving Serious Consideration to Leaving the State https://escholarship.org/uc/item/96j2704t#main

thimk
thimk

next stop; civil asset forfeiture .

Blurtman
Blurtman

Chicago must be allowed to print own currency.

stillCJ
stillCJ

Editor

Here is a great source for a "taste of Chicago": https://heyjackass.com/

Realist
Realist

Mish, based on the majority of comments, I would suggest that leaving Chicago, or Illinois is not good enough. You should leave the US.

MickLinux
MickLinux

I think we might learn something from the 2008 crash: there is ALWAYS can to kick. For example, Chicago could take a page from Norfolk's book (Hampton Roads Transportation District), and have the state combine Chicago's school system with that from nearby fiscally conservative cities "for mutual benefit and regional unity". Thus the ants can be forced to fund the grasshoppers' boondoggles. And to justify it, they could find a whole new boondoggle, to be centered in Chicago, but paid for by its neighbors. Western Springs, Northbrook, Wilmette... it's time to step up to the plate.

dowjones3900
dowjones3900

The voters of Chicago voted the politicians into office that created this problem. They will also suffer the consequences. This will also be true of our federal government. Just look how much they have accomplished this year and when was the last budget produced?