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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. The city and school district are already junk rated by Moody’s.

Chicagoans are on the hook for more public sector debts than any other major city in the country.

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.

All those problems are contributing to Chicagoans’ flight. And as the city’s population shrinks, the burden will only get bigger on those who remain.

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

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Governor of Alderaan

Wait for Lori to claim the $200 million in savings from refinancing bonds again next year and every year thereafter. Any corporate officials who ran their company’s finances in the corrupt dishonest way Chicago and Illinois run theirs would be in prison

Willowglen

These refinanced bonds are secured by tax proceeds. The City will likely soon run out of assets or proceeds to be secured at a priority to induce issuers to lend. There is only so much lienable capacity. The one good thing (i guess) is that these bonds have a maturity equal to the existing ones, so the scoop and toss deferral is absent, but I can’t look at this one time fix in any way replicable or anything more than an 18M reduction in interest expense this year, a drop in the bucket in terms of closing the deficit.

Rather, Not

The solution for Chicago is simple, but it will only happen once the taxpayers have had enough and revolt against their public supposedly servants, in fact masters. The public masters and their precious pensions are both the problem and solution. The power to tax is extremely broad and the public masters count on it being used against you for their benefit. Reversing that with a simple pension surtax (paid upon payment of the pension, probably pretty progressive) is the solution. Give the pensioners the (ridiculously generous) pretax pensions they were contractually promised, but tough luck if there are a bunch… Read more »

The Truth Hurts

If you tax a public pension you would need to tax all pensions. That pesky constitution.

Even if you did tax pensions you would lose your ability to tax them if the pensioner left the state. Pension money is taxed based on the state where the pensioner lives when receiving the pension payment. This is federal law so Illinois couldn’t change this on their own.

This is the problem with our financial troubles. Everyone acts as if there is an easy solution when in fact all roads lead to pain for all Illinois taxpayers.

Rather, Not

Not true. It is very possible for a taxing authority (be it city, state etc) to tax its own pensions. Nothing at all unconstitutional about Chicago adding a surtax to City of Chicago and Chicago School District pensions, and leaving military vet pensions and GE pensions alone.

James

Maybe, but your logic seems shaky to me. First, I can’t imagine counties or cities could create a tax clearly prohibited when done at the state level by the state constitution. Secondly, the public employee retiree’s pension is paid as income rather than for some other purpose, making it theoretically subject only to income taxes—except here in IL at the present time. To claim that IL can deduct some new tax with a name other than being called an income tax when the purpose of the disbursement is clearly for the retiree’s income seems a huge stretch of logic to… Read more »

Rather, Not

1) State unconstitutionality: While it is not clearly, it is actually a pretax guarantee, not an after tax guarantee, otherwise the income tax increases would be unconstitutional as well. 2) A surtax on sending the money out, not on the retiree’s total income, is different and would clearly pass legal muster. It is not looking at deductions, it is not looking at spousal income, it is not looking at SS, it is a surtax strictly on ‘excess’ pension payments. The public employees would hate it, and would fight it politically, but it is perfectly legal and constitutional. If you doubt… Read more »

James

Rather, Not: I have no disagreement at alll with your statement that the IL public public employee pensions are only guaranteed as to the gross amount owed each pensioner rather than any net income after allowable deductions, but if the reduced pension income goal is aimed at that group specifically rather than any, and all, IL retirees I think you’re likely dreaming because its not a hard argument to make that the obvious goal of any such legislation it to diminish the pension income of that specific group. That’s likely the rub in terms of being allowable by the courts.… Read more »

loki

that wouldrequire Chicago to implement a income tax which it doesn’t have. as in all laws whats good for the goose is good for the gander so chicago cannot narrowly impose it on a specific subset.

Rather, Not

Also not true about not being able to tax them when they leave. True enough that ‘income taxes’ are based on residence, but the new pension payment surtax can be made when and where the pension is paid out…in Chicago. A Chicago surtax on a Chicago paid out pension to a retired Chicago worker in income tax free Florida. The Surtax is on the payment out of the pension system in the taxing authority, not on where the recipient lives. The solution really is that easy. Although the public employee unions and their hacks will certainly do their best to… Read more »

The Truth Hurts

Wrong again. The federal government clarified this in the Pension Source Tax Act of 1996 (P.L. 104-96). “No State may impose an income tax on any retirement income of an individual who is not a resident or domiciliary of such State.” See…not that simple.

As far as taxing only government pensions you can be 100% certain that this would just be seen as a work around of both contract law as well as the constitutional amendment stating that benefits shall not be reduced. The IL SC has been very clear.

James

Yes, it’s simple alright but likely so transparent in its underlying purpose so as to be seen as clearly intended as diminishing an IL public employee’s state pension income in its obvious effect, something prohibited by the 1970 IL Constitution. What’s equally egregious and likely unconstitutional is that the income tax you propose is a progressive tax rather than a flat tax, the only kind of state income tax currently allowable. The first problem might be alleviated if it applied to the retirement income of all retirees in IL, but your plan applies it only to IL public employee retirees.… Read more »

Rather, Not

See my above. Contort around it. Not another income tax. A pension surtax. While it is clearly diminishing the city pensioners AFTER TAX income (the point), while leaving their Constitutionally protected pretax pension payment amount intact. It is well established that the protection is on a pretax basis, not an after tax basis. (otherwise changes in all other taxes, income, property etc would already be violating it, which they’re not). The power to tax is extremely broad, which is why the city is able to reach into all sorts of nooks and crannies to feed the gaping maw of public… Read more »

The Truth Hurts

You can change the title of the tax all you want but the IL Supreme Court has been very clear. All the contortion in the world will not save you. I suggest you read the May 2015 ruling. Check out paragraph 69. The United States Supreme Court has made clear that the United States Constitution “bar[s] Government from forcing some people alone to bear public burdens which, in all fairness and justice, should be borne by the public as a whole [citations].” (Internal quotation marks omitted.) United States v. Winstar Corp., 518 U.S. 839, 883 (1996). But by all means… Read more »

Freddy

These are just a few questions. Are pensions taxed on the Federal level but not on the state level? If yes does that not in fact diminish the pension as would a state tax. Could or should the phrase “impair or diminish” include Federal tax’s also. The Federal tax (if yes) for many pensioners would be around the 22-24% bracket and only a few are at the 37% level. Is it true that pension management fees diminish the total assets but not an individual pension. Just curious.

The Truth Hurts

Pensions are taxed federally but not currently taxed by the state of Illinois. The state also doesn’t tax 401k or IRA withdrawals. Taxing Illinois pensions is not and would not be considered an impairment. Pension payments are considered income and are subject to federal and state tax laws. The state is well within their right to start taxing this income but not allowed to just tax Illinois government pensions and leave other pensions alone. The courts would see this for what it is. When the unions challenged the law all of the legislative records would be on display as to… Read more »

Freddy

Thank You for clarifying!! Sorry to sound like Columbo but just one more thing! Does the impair or diminish clause pertain only to public pensions or to private (corporate-carpenters-plumbers-etc) as well? Reason is there was some chatter a while back about taxing private retirement accounts including 401K’s/IRA’s/etc to pay for public ones which would be illegal. The lawmakers (maybe) could get around that instead of calling it a tax by using the words surcharge or fee. Taxing private accounts to pay for public pensions would bring out rage in the private sector. Regardless it’s still a mess.

debtsor

The IL Supreme Court (those Democrats including Burke’s wife) in their infinite wisdom interpreted the IL constitution to mean that IL public pensions cannot be diminished or impaired. That means to changes. However, other states have similar wording but have interpreted the clause differently and have allowed pension modifications. Different courts come to different conclusions on the same facts all the time, that’s why we live in a common law system. Except that our IL supreme court has serious conflict of interest issues with this pension thing – because they collect pensions themselves – and they just didn’t care, they… Read more »

The Truth Hurts

The IL Supreme Court (4 Democrats and 3 Republicans) did rule that pensions can not be impaired. Blaming this on just Democrats is intellectually dishonest. It was a 7-0 decision. Republicans drafted and sponsored the 1970 amendment that stated pensions are a contractual obligation that can’t be diminished or impaired. Republican Governor James Thompson in 1989 added the 3% annual compounding that many believe to be the biggest issues with these pensions. Republican Governor Jim Edgar was responsible for the pension ramp that allowed the debt to grow to its’ current size while making it seem like the state wasn’t… Read more »

debtsor

Who is arguing otherwise? I just said Democrats including Burke! I don’t consider the Republicans in IL to be Republicans. They are RINOs. So basically Democrats.

The Truth Hurts

Illinois is well within their rights to tax 401k and IRA withdrawals just like many other states. You can find an article on this site discussing the growing talk around the state taxing retirement income. Since the state needs the money to pay pension obligations many articles equated this to “stealing” money from private retirement accounts to fund public pensions. Would the state just tax private retirement accounts and not public pensions? Doubt it because of the optics that you mention. Much easier to just tax “rich” retirees and make them pay their “fair share”. That appears to be the… Read more »

Freddy, just public pensions

Freddy

Thank You Mark. This is a very good debate so far from everyone. Good points all around. I’m trying to grasp this whole concept. How can a law be made that pertains to a only select few and not the general public? Example- The distracted driver law (basically for texting) would pertain only to women. There would be outrage. Or speed limits for men 70 speed for women 60?

The Truth Hurts

You would need to dive deep into the history of public pensions to understand. Public pensions at one point in time were considered a gratuity rather than a contract. Public employees would pay their share into the pension but the state was free to reduce or eliminate the pension at any time. This struck some people as unfair so some states started adding language that spelled out exactly how public pensions were to be treated. In Illinois they added the language to the constitution. During that process it was discussed that pensioners have a contractual right to have their pension… Read more »

Rick

Funny how progressive thinking always results in the most regressive tax policies when they run out of SEM, somebody else’s money. And how the speeches of progressives like lightfoot as championing the middle and lower classes, when math is applied to their actual results, shows that their policy is just a combat boot across the neck of those very constuents. Gas, ecigs, gambling, ride share, red light cameras, water, pop, carry out food, etc. Are all blatently regressive taxes. Rahm was a right winger compared to lightfoot. The level of a progressive can be measured by how regressive their taxes… Read more »

debtsor

There’s only a handful of candidates I’ve ever voted for who were openly Democrat (I usually vote for the losing Republican opponent), and Rahm was one of them. I’d vote for him again/ But he saw the progressive writing on the wall and he knew he was toast.

riverbender

Raise taxes, no spending cuts and the deficit grows…just another Chicago budget once again.

michael marek

excellent analysis (unfortunately for taxpayers and our state)

Rob Maitino

This article should be on the front page of the Tribune every day., and should be the lead story on every newscast, every day. Like Ted Koppel did with the Iranian hostages. These gutless politicians running this state are all engaging in malpractice. Madigan has presided over all of it. He goes all the way back to Thompson. Fullerton is a crook too.

U 221f

Spot on analysis as usual!

State Pension Millionaires

Yes. Excellent content as per usual.

mike Williams

Once the data in the last graph (debt per household by income) becomes common knowledge, the race to relocate to another state will accelerate. Almost everyone I still know in Illinois has a timeframe..”a couple more years until the youngest graduates” or “one more year until I’m fully vested”. I think in many cases it will be the parents and grandparents following their recent college graduates to another state.

Bross

Would like to know the assumptions for the motor fuel tax revenue. What happens when a truck manufacturer moves to electric power for urban delivery vehicles? What happens when gas vehicles decline in usage? What if the revenue projections are wrong or decline over the course of 20 years? Does the bond holder make up the difference? Can we see how well other assumptions like this worked out? Or nobody cares because the taxpayer is on the hook? And next year the city loses out on the motor tax revenue because it’s being diverted to bonds. How is that hole… Read more »