Chicago, New York, Los Angeles — Bankrupt Cities, Riots are Coming

Calling  the Chicago pension crisis the worst in the nation is saying something – like,  how bad can it get?

The  city’s underfunded pension system for teachers, firefighters, police, and  transit workers threatens to punch a hole in the city budget that would  devastate city services. The teachers’ alone are $1 billion short of funds,  while the city as a whole is looking at a whopping $27 billion  shortfall.

The  state of Illinois is even worse off with more than $100 billion in unfunded  pension liabilities. Where is the money going to come from to fix the  problem?

Financial  Times:

But  this month, after years of inaction, Illinois passed a bill to tackle  its  unfunded pension liability. The state hopes the new law will save  $160bn over  the next 30 years – savings that will  come from cuts in  retirement benefits for state workers and forcing the state  to make its  pension contributions.

The law has won plaudits as a first step  towards  fiscal reform. But it comes only after repeated downgrades that have  left Illinois with the lowest credit rating of any US  state.

Now  it is up to Mr Emanuel, the hard-nosed former Obama  administration official, to  do the same for Chicago. Any proposal to  solve the city’s pension problem is  bound to look much like the state  deal – cutting benefits for public workers  and raising contributions.

“The  pension crisis is not truly solved until relief is brought to  Chicago and all  of the other local governments across our state that are  standing on the brink  of a fiscal cliff because of our pension  liabilities,” Mr Emanuel said after  the state deal.

The  Chicago teachers’ pension fund is roughly 54  per cent funded, far below the 80  per cent threshold considered healthy.  But it is better off than the city’s  municipal workers, police, labour  and firefighters’ pension funds, which Fitch,  the credit rating agency, estimates are collectively 33 per cent  funded.

Mr  Emanuel has warned that failing to reform Chicago’s pensions by  next year could  force cuts in services – including the police  department, at a time when the  city has had the highest number of  murders in the US. The alternative, he says,  would be a 150 per cent  rise in property taxes.

His  administration points to the recent reform of the city’s parks  department’s pension system as a model. Retirement  ages were raised,  with workers no longer able to retire at 50 with full  benefits,  employees will pay more  towards their retirements and the city will  increase its  contributions.

Still,  Mr Emanuel has been criticised for backing plans to delay some  payments, and  Moody’s has attacked Chicago’s latest budget for failing  to set aside enough  money for pensions. And the unions are preparing to  fight back in Chicago, just  as they have against the state deal, which  they are challenging in court. A  coalition of unions called the state  reform “attempted pension  theft”.

Not  surprisingly, Chicago already has every high property tax rates and raising them  150% would almost certainly lead to a Detroit kind of exodus.

Forcing workers to  pay more for their retirement is only a partial solution. What’s needed is  radical surgery to alter the concept of public pensions, moving from defined  benefit plans to defined contribution plans. The savings would be enormous. The  problem is, you can’t grandfather in defined contribution plans. Workers already  receiving pensions under defined benefit plans would continue to do so. And for  those workers close to retirement, it would be unfair to change their pensions  just before they begin to collect.

There  are no easy solutions as cities across America face up to this “pension bomb.”  Eventually, many observers believe Washington will have no choice but to step in  and bailout the worst of them or we’d have catastrophic chain reaction  bankruptcies across the country.