By: Ted Dabrowski and Mark Glennon
Let’s start with the good because it’s short. Mayor Rahm Emanuel’s grand plan for fixing Chicago’s pensions, released December 12, included a call to amend the pension protection clause in Illinois’ constitution. He accompanied that call with harsh criticism of the automatic 3% COLA that inflated two of Chicago’s four pensions – a benefit currently protected by the clause.
His words, even if they come to nothing in the near term, are meaningful in the long run. It’s the first time any major Democratic officeholder has acknowledged two conflicting realities about Illinois’ pension system: pension benefits already granted are unaffordable, and yet there is a constitutional clause that says they nevertheless must be paid.
Someday, after Illinois has sunk much further into the abyss, the impossibility of the coexistence of those two facts will be accepted as obvious. Rahm’s comments, hopefully, will make that day come sooner.
Other than that, Emanuel’s proposal is a litany of wrongs, many of which are the very ones that created the fiscal crisis that has crippled Illinois, Chicago and most of its municipalities:
1. More generational theft. The central feature of Emanuel’s $10 billion borrowing plan is a $7.7 billion POB, or pension obligation bond. The money borrowed through the bond offering would be given to city pensions, lowering their unfunded liability but increasing the city’s debt by an equal amount. The increased pension health would be an illusion – Chicago taxpayers would be no better off because the bond merely swaps one form of debt for another.
What’s worse is for Emanuel’s plan to work, the repayment of the bonds extends far into 2055, pushing the burden onto Chicago’s future generations.
Read more about why POBs fix nothing: Chicago’s pension bond scheme
2. Another asset sale. Actually, Chicagoans would be worse off because the POB would be created through yet another “securitized” loan – a sale of the city’s financial body parts. Because Chicago’s credit is so poor, bond buyers are now requiring more from the city to make deals work. That’s where the new securitization scheme comes in – where the city sells full ownership of city assets over to bondholders.
The city has already sold off most of its future sales tax revenue in this manner. And the proposed new sale actually includes the residual assets left over from the previous sale. It’s as if the city is selling the bones left over from its last sale of body parts.
Read more about Chicago’s securitization scheme: Liquidation Sale. That’s How To Think About Chicago’s Proposed Pension Bond
3. It’s another giveaway. The POB is essentially a big give away to the city’s combative anti-reform unions. Rahm is not asking for any underlying reforms in exchange. What’s the sense in handing $10 billion of borrowed money from Chicagoans wallets without demanding concurrent reforms? At the bare minimum, the city could condition the money on support for the COLA changes Emanuel said are needed.
Read more about the fundamental reforms Chicago and Illinois need: Emanuel’s call for a constitutional amendment shouldn’t be narrowly construed
4. It’s a pure gamble. The bonds would probably carry an interest rate of 5 to 6 percent. The hope is that the borrowed money, when invested in the stock market by the pensions, will meet or beat that rate. Chicago, like so many other cities and states that have tried POB’s, could lose big on that bet. It’s gambling with taxpayer dollars, which is why government-management organizations like the Government Finance Officers Association advise against POB’s.
Read more about the gamble inherent in POBs: Chicago CFO’s Stupendously Bad Timing On Her Last Pension Obligation Bond
5. The plan’s description is incomplete and misleading. The city’s original summary of the bond plan was misleading and incomplete. For example, it claims the pension bond is just like refinancing a mortgage — simply trading a lower interest rate for a higher one. That’s nonsense. And any real projections are omitted. The city provided only partial numbers on future, required pension contributions and the plan’s purported effect on unfunded liabilities.
Read more about Emanuel’s poor analysis: Emanuel’s misleading pension bond presentation to Chicago aldermen
6. It doesn’t end the crisis. Despite all the risks associated with the above, the plan won’t even come close to ending the city’s pension crisis. If successful, the funded ratio of the city’ pensions would improve to only about 50%. That is, the pensions would still have on hand only about half what actuaries say they should to pay out future benefits.
Read more about the depth of Chicago’s pension crisis: A more likely reason Rahm Emanuel dropped out: the Chicago time bomb
7. Success relies on sin taxes. Emanuel’s other “reform” path relies on sin taxes to fix pensions. He wants tax revenues from a Chicago casino and legalized marijuana to help plug Chicago’s pension hole. Never mind if those taxes burden Chicago’s poor even more and bring on greater social costs. And never mind if those new revenues cannibalize other “entertainment” revenues. The whole thing is a bad idea if success is predicated on city residents gambling more and smoking more pot.
Read more about the relying on gambling revenues: Beware Revenue Hopes From Expanded Gaming As Industry Cannibalizes Self
It’s too bad the mayor’s only legitimate proposal, a constitutional amendment, will be dismissed by the political establishment and that the debt and tax proposals will get all the attention.
Perhaps that’s all that can be expected. After all, Emanuel is a lame duck. The entire plan seems designed to protect the mayor’s legacy, not to actually solve the city’s pension crisis. This is Emanuel’s parting shot at Illinois, so that when the true fiscal crisis hits Chicago, he can say “I told you so.”