Chicago’s fiscal crisis requires real reform

Rather than “finishing the job” on the city’s pension crisis with his new budget proposal, Mayor Rahm Emanuel is diverting attention from a series of new potential pension crises in the near and distant future.

It’s true he is stepping up with a huge property tax increase. He’s doing it just the way his predecessor did, too, unveiling it immediately after an election in which he refused to talk about it—indeed, in which he attacked his opponent for once having supported a property tax increase.

The next pension crisis is embedded in this year’s budget, which provides hundreds of millions of dollars less than current law requires for the city’s police and fire pensions, and relies on legislation “reforming” its municipal employees and laborers funds which has already been declared unconstitutional.

It’s increasingly unlikely that Gov. Rauner will ever sign Emanuel’s bill reducing the city’s contributions to the police and fire funds for the next five years. And Emanuel’s legislation cutting benefits for the municipal and laborers funds is likely to be struck down by the state Supreme Court.

When that happens, the city is back at square one, with a huge unfunded pension debt—and a brand new pension crisis. And at some point, if Rauner doesn’t come through for the mayor, aldermen may be called back to vote for a higher police and fire fund contribution.

After that, in the mayor’s highly contingent pension reform plan, payments to the city’s four funds grow steadily, from $880 million this year to $1.6 billion in 2020. That will involve a lot of “stepping up to the plate” to “finish the job.” Meanwhile the unfunded liability will continue to grow, while the total, long-term cost of paying it off will grow dramatically due to the delay.

It may not be coincidental that, suddenly, there’s a general consensus that Emanuel’s second term as mayor will be his last. Let someone else worry about 2020.

At that point, the city would be required to pay enough to achieve 90 percent funding by 2055, which will mean another big jump in city contributions. But even those payment plans are backloaded, so that they steadily increase, doubling over the next couple of decades. Unfortunately, so does the unfunded liability. For the laborers fund, for example, the plan’s unfunded liability continues to increase until 2032, at which point it finally starts to go back down, slowly. And that assumes investment returns are healthy.

The truly responsible approach would re-amortize the pension debt with flat-dollar annual payments, rather than a backloaded payment schedule that grows the unfunded liability and balloons costs in later years. That would require an even larger property tax increase this year, but over the years it would save lots of money.

Judging from comments at a Northwest Side meeting by Progressive Caucus aldermen on the budget Tuesday night, however, there’s widespread opposition to Emanuel’s proposed increase. It runs along two lines: working families can’t afford an increase, and the “ultra-wealthy and big corporations” aren’t paying their fair share.

Noting that many of his neighbors are already having trouble paying higher water and sewer fees from Emanuel’s first term, Hermosa block club leader Colin Bird said a big property tax hike “would be too much for many of my neighbors to bear,” and added, “It’s not fair at all to expect so much from people that have so little.”

Bird said he’s “a big fan” of an alternative minimum property tax for downtown office buildings and for “bolstering the Chicago Department of Law to challenge undervalued commercial properties.” He added, “If there’s going to be an increase, it must ensure that those most politically-connected share an equitable burden.”

Ald. Sue Sadlowski Garza said the mayor had included none of the progressive revenue sources proposed by the Progressive Caucus, including the alternative minimum tax or “substantial reform” of the tax increment finance program, which she said could bring in as much as $2 billion a year. (That’s the total TIF surplus expected by the end of this year.)

It’s a conundrum. A responsible approach to funding pensions will require additional property tax revenues. At the same time, property taxes are, indeed, too high.

You often hear that Chicago’s property taxes are lower than the suburbs. That’s true, though many suburbs pay higher property taxes knowing they are getting excellent schools in return. Chicagoans don’t have that comfort.

But the larger truth is that property taxes throughout Illinois are too high; we have the second highest in the nation. That’s because the state’s inadequate revenue system, which lets higher-income earners off the hook, is unable to fund schools at the level called for in the state’s constitution.

Property taxes are high for commercial properties, too—they’re assessed at 2.5 times residential properties, though many of the largest go on to win big reductions —and property taxes in the Loop are among the highest in the nation. That’s also a function of the state’s regressive revenue system.

The difference is that the financial and real estate sectors that pay downtown taxes benefit from that regressive system. Most of the corporations pay no income tax. The people who make the most money there pay the same income tax rate the rest of us do, and most of them pay their property taxes outside the city. As long as our political leaders rule out a progressive income tax or a financial transaction tax, shifting the burden back onto commercial properties is one of the few ways we have of forcing that sector to pay something closer to its fair share.

In the meantime, it looks like neighborhood activists are prepared to do what they can to shield working-class homeowners from the impact of the coming tax hike. And they promise to keep pushing Mayor Emanuel to consider the progressive revenue proposals from the Progressive Caucus as a way of getting at those who are best able to pay—and who, as it stands, aren’t paying their fair share.

But a real pension solution may ultimately require real tax reform.