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By: Ted Dabrowski and John Klingner

Coverage of the Chicago teachers strike focused largely on the contest of wills between a new mayor vs. a combative teachers union. But now that’s its over, the cost of the contract is finally being tallied and it totals at least $1.5 billion over five years – money the junk-rated district simply doesn’t have. It’s the most costly teachers contract in CTU history, and that’s even before the cost of pensions is considered. CPS has yet to utter a word about increased pension costs.

Just two to three years ago, CPS faced a true liquidity squeeze. Its position was so weak it actually borrowed to cover its debt payments. Only a state bailout – more money from a favorable new funding formula and a pick up of the district’s $220 million in normal pension costs – got CPS out of its mess. Now, the costs of this new contract set CPS back on the path it was on two years ago. And it accelerates the district and the city’s slide towards bankruptcy. 

Wirepoints has run an initial estimate of the contract’s costs using the 41-page agreement and the limited data publicly available. The cumulative 5-year costs total $1.4 billion, though that estimate doesn’t include the value of many benefits due to a lack of data: sick day accumulation, additional health care benefits, stipends for support staff, and more. It also does not include how much the district’s pension liabilities will go up as a result of the contract – what Mayor Lightfoot calls the “most generous” ever.

Wirepoints’ cost estimate includes Mayor Lightfoot’s original offer of 17 percent raises across the board, additional raises on top of that for select workers, and the hiring of hundreds of new support staff. The contract will cost Chicago an additional $500 million a year by 2024. 

Taxpayers – the same ones that are expected to plug the city’s $838 million budget deficit – will have to shoulder the cost.

CPS’ credit rating, according to Moody’s, is still five notches deep into junk, and the district’s pension shortfall is nearly $25 billion. With little ability to borrow more, and with additional money from the state still in doubt, higher property taxes are likely the only way for CPS to pay for the contract.

Wirepoints’ estimate coincides largely with the $1.5 billion the CPS budget office has reported, though it has yet to release the details behind that amount.

What about pensions?

The budget office also hasn’t released any estimate as to how much this contract will boost the cost of pensions. Pensions haven’t been a part of the discussion since the beginning of negotiations.

The district’s pension shortfall was expected to increase by $1 billion to $13.2 billion by 2024, even before the new contract was agreed to. Now Chicagoans can expect the shortfall to rise more than was already predicted by the actuaries. Salary increases of more than 24 percent for the average teacher, 48 percent for the average nurse and hundreds more in staffing are sure to increase the district’s pension obligations.

Another pension cost yet to be tallied is the new contract rule allowing teachers to accumulate 244 days of unpaid sick leave. The previous contract only allowed them to bank up to 40 days over their career.

Under current pension rules, teachers who accumulate that 244 day maximum amount of sick leave can exchange it for more than a full year’s worth of pension service credit. That allows those teachers to retire at least a year early and still collect their full starting pension benefit. To see a comprehensive report on bankable sick leave the by same authors, read Unpaid sick leave spikes Illinois teachers’ pension benefits.

Ordinary Chicagoans in the private sector don’t get anything like the benefits offered in the teacher’s contract – guaranteed, multi-year raises, bankable sick leave, premium healthcare benefits, etc. – but Lightfoot has locked them into paying for this contract for five years, regardless of the eventual state of the economy.

It’s a deal set to drive even more Chicagoans out. The city’s population is already shrinking, the only major metropolitan area in the country to do so. Real home prices have fallen since 2000, making Chicago an outlier nationally. And per-household debts for government worker retirements are the nation’s highest for any major city. 

People can debate who won the strike all they want, but expect everyone to lose. As more Chicagoans leave, the burden on those who remain will become impossible.

Updated 11/5/19

Read more details about the strike and Chicago’s financial crisis:

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Rick

I looked up the house I grew up in, in Westlawn, where many cops live. It’s a bungalow, typical. The property taxes are only $2300! Lightfoot has plenty of room to double bungalow tax rates and still be below suburban rates. She gave herself this problem, she should now put her money where her mouth is. She should use the phrase “fair share” when she announces the bungalow rates going up, that’ll work.

Douglas

Yes, but did you crunch the numbers with Sanders, Warren or AOC numbers? Pennies from heaven people!

susan

Assumptions:
$235,000 median home value, $53,000 median income (US Census Quick Facts)
$200,000 30-year loan, 3.75% mortgage interest rate. $100/month homeowners insurance. 200,000 fair value assessment at 3.4% property tax rate, monthly payment $1593. ($1593×12)/$53000= .36= 36% debt-to-income ratio (Bankrate.com mortgage calculator)
36% debt-to-income ratio lenders require for mortgage loans (Investopedia.com)

susan

Raising Chicago property taxes would accomplish a lot. Here is an interesting inflection point: 3.4% property tax rate. Chicago (unlike collar counties) is nowhere near that thanks to its unique ability to issue alt rev bonds for funding expenses. Chicago can and does keep property tax rates artificially low, choosing to accumulate debt instead. Chicago, mostly around 2% p-tax rate (although Glenview and Harvey are outliers) is not ‘feeling the pain’, and homeowners’ voting choices may reflect that. At 3.4% property tax rate, median income households in Chicago no can longer qualify for mortgage loans on median value homes. This… Read more »

Thanks for the empirical validation. We’ve guestimated before that the death spiral rate begins at something in the three percent range.

That would be a good thing for a paper or article in itself — lay out the formula so folks could easily plug in their community’s average home values, household income, mortgage rates, insurance.

However, perhaps that doesn’t capture the whole issue. Even if tax rates were below that, a huge disincentive is created for improvements and property additions, leading to decline.

Susan

You could be spot on. It depends on variables such as mtge interest rate,years- length of loan , current values of median hh income and median home prices. In Woodstock IL, once we exceeded3% ptax rate shortly after the crash, rates took a quick.leap to nearly 5%. As you know, lower denominator causes higher rates, which cause lower denominator…death spiral. And levies never fell. School spending is locked in at increasing even as enrollment fell and State support rose. The rate has recently dropped to about 4% due to home values so depressed as to be attractive to vulture investors… Read more »

Willowglen

I wonder whether the inflection point in Chicago will occur at a lower figure than 3.4 percent. The value of services receive in exchange for taxes paid is low compared to let’s say, Lake County, which believes it can sustain high rates because it is not much of an accomplishment to provide a higher level service than Chicago. So you not only have a mathematical inflection point where qualification for mortgages is not possible, there is a value based inflection point by home buyers where purchasing makes no sense, particularly with the quality of the schools.

There’s also the anticipation of higher rates, which is high in Chicago, and reasonable. Current, actual rates aren’t everything.

Susan

Agreed, however my theory is that due to Chicago’s artificially LOW ptax rates, real estate values in Cook County exceed true fair values relative to collar counties forced by law to levy full expenses annually.

we can see on Case Shiller comparisons that chicago property values have outperformed collar counties (while ALL Illinois property values lag national appreciation trens).
What other causative factors exist, besides tax rate differentials of 1%-3%?

debtsor

Chicago is under taxed for sure. The $300k condo in Chicago is taxed at a little more than half the rate of the $300k house in Palatine.

Susan

Yes, good point, but i am just trying to address non-subjective issues. No political argument can be made about inflection point at which median income households cannot qualify for a mortgage loan on a median priced home. No political argument can be made that such disqualification doesn’t remove an enormous pool of potential buyers. So the only political arguments left available are why that isn’t supposed to matter to voters. BTW Lake county is not immune to this formula. Just change the variables of median home value and median hh income (upward), but it still holds true. BLS reports on… Read more »

Willowglen

No doubt Susan this is a sound approach. If mortgage lending becomes prohibitive for middle class people, the downward spiral kicks in. And empirical data doesnt follow a political party.

Freddy

Mark- I have been following the conversation between you and Susan and I think 1 very important point is missing. According to Article IX Sec 4 in the Illinois Constitution the highest tax rate within a class cannot be more than 2.5 times the lowest class in counties of more than 200,000 population. Meaning industrial class cannot be taxed at MORE than 2.5 x residential class. Example $1M home pays $10K and next door McDonald’s also worth $1M would pay $25K but not $30K. Seems like all the commercial/industrial properties are and have been subsidizing residential to keep tax rates… Read more »

Susan

Interesting!! I am in McHenry County and as far as i know, all Counties in Illinois assess residential AND commercial properties at 1/3 fair market value, with only Cook County allowed the exception of the additional property class assessment ratio for commercial/industrial properties (although in all of Illinois there are discrete property classifications of farmland, solar, railroad, , and other property classes for assessment purposes). I never thought about your observation before. This observation deserves careful analysis because it could yield non-obvious actionable solutions . My analysis would run like this: Tax Rates are a function of Total EAV (equalized… Read more »

Freddy

Susan Thank You for your kind words. Another factor for our high property tax’s is in our counties we are under PTELL jurisdiction so any abatement or tax incentive given to any one or business is passed on to everyone else in the form of a higher tax rate. Chicago is not under Ptell only home rule but Cook county is. If you are familiar with Lincoln Square in Chicago (Lincoln-Western-Lawrence-Foster Ave’s) there is much more commercial there and home values have skyrocketed whereas just a little west of there at Kedzie/Foster (North Park or Albany Park? not sure )… Read more »

Freddy

Susan Just a follow up. Lincoln Square tax rate residential is 6.786% vs North park? at 6.808% a little less but a far cry from Rockford’s 14.27%. The home in Lincoln was $503K tax’s $9,400 in Rockford same value tax’s $23,276. Insanity!! If you want a good laugh check out Marx Brothers “Sanity Clause”. That’s how our pols make deals.

debtsor

Rockford has so many vacant properties they have to overtax everyone else to make up the difference. I was just there twice in the last few weeks, it was like driving through Detroit heading up Kiswaukee. The red signs with the white X were everywhere, huge industrial buildings were vacant, empty store fronts, abandoned homes.

susan

Yes. And look what an opportunity that creates for those who engendered that scenario. Political Industry has access to OPM, leveraged OPM. Real Property can be purchased for nearly nothing if one owns a bank, or has the personal favor of banks. Once title changes hands, you think public money might come gushing in, pensions and union contracts suddenly might become re-negotiable, and property values might appreciate off the bottom? I saw this classic scheme play out in Zimbabwe years ago (Ministers coveted dairy farm land, priced-fixed milk below cost of production. Dairy farmers stopped producing milk at a loss.… Read more »

Freddy

debtsor So true.Lots of blight. I’m glad your still alive. Avoid School st. and surrounding streets on the west side at all costs especially at night unless you have a bulletproof vehicle. Have you visited Anderson Japanese Gardens? Voted #1 in North America. Amazing!

susan

The home value is inextricably linked to tax rate, an inverse correlation. My belief is that Chicago is artificially inflating its property values by keeping levies artificially low. They can do this by funding operating expenses with public debt, something other Counties may not do (but are finding clever workarounds to do so in effect). My belief is that there no solutions possible for Illinois until Chicago homeowners (voters) are forced to ‘feel the pain’ of the situation they created. Short of that, judicial review is one of the few self defense mechanisms left for homeowners. Judicial review of the… Read more »

Susan

1. Such a significant factor in our aberrant ptax rates : “any abatement or tax incentive given to any one or business is passed on to everyone else in the form of a higher tax rate”. So true. So I like to look at school District taxing regions, because they comprise lion’s share of ptax Bill’s, and which may encompass several different townships in our case or neighborhoods in Chicago’s case. Look at the properties in just that region. The particular school District tax rate is determined as a function of: 1. How much does that school District levy to… Read more »

Freddy

Susan Check out Ted Biondo’s blog explaining Ptell from RRStar. He was on the Winnebago County board now retired. He was and is a true advocate of taxpayers. He explains on how Ptell works against taxpayers when property values go down and how taxing districts are saying they are losing money by the 5% cap on the way up. They actually do not lose money from the year before since they can collect what was LEVIED (not billed or collected) before any deductions. He also has info on home rule pitfalls. Thank you for the 2.5 to 1 explanation. The… Read more »

susan

I believe these answers to questions I understand you are asking: 1. Cook County Residential is assessed at 10% of fair value, and commercial property at 25%. This fulfills Constitutional requirement of 2.5-1 ratio. 2. For Commercial properties: Assessor may take into account, and smooth out the values by assessing on Replacement Cost method or Income Method rather than market value/sales. (so 25% of ‘fair value’ can become closer to 10%). 3. After the assessments are made Illinois issues an equalization factor to get that 10% of fair value closer to 33.33% of fair value like all the rest of… Read more »

Danni Smith

remember that scene from All in the Family?-Edith is going through menopause and Archie is being told her moodiness is because she is going through the “change”. Archie, in a fit of pique, says to Edith, “If you’re gonna change, change already.” My sentiment, collapse already-you’re so, so close.

nixit

Why would CPS freezes health insurance premiums for the next 3 years in a time of ever escalating insurance premiums?

The charter school freeze was a non-give as there’s no way to justify the opening of any new schools with declining enrollment.

244 sick day accrual is just sick. Those veteran teachers must really want out of the system.