Let the message from Detroit be heard in Illinois
Chicago pension woes may soon reach crisis stage
Union bosses who are furious at the Illinois General Assembly for passing pension reform can’t wait to get into court to challenge the new law. They have a contract right, they say. The Illinois Constitution protects that contract right, and no one can touch their benefits.
Next year, the Legislature will have to take up the pension crises that face Chicago, the city’s schools and other local governments. The law passed Tuesday is likely to be the template for local government pension reform. The union bosses will be furious again. They will go to court and argue that the state constitution protects their benefits.
But look at what happened in Detroit on the same day the Illinois Legislature voted to rescue the state from financial ruin by reforming the pension system.
Federal Judge Steven Rhodes ruled that Detroit could enter into bankruptcy – and that pension benefits are not entitled to any heightened protection in a municipal bankruptcy.
The message from the judge in Detroit is unmistakable. If a local government collapses and winds up in bankruptcy, the government’s workers and retirees cannot count on state constitutional guarantees to protect their pension benefits. If the government collapses, if it winds up in bankruptcy, those benefits are at risk.
The language in Michigan’s constitution that protects pension benefits is similar to the pension language in the Illinois Constitution.
Detroit is insolvent. It can’t pay all of its bills. It must shed its debt. Extremely painful cuts are coming. Its public-employee pension liabilities are likely to be written down just as other debts are. As a result, pension benefits – which in some ways are more modest than those promised to many public employees in Chicago – are likely to be trimmed.
Reducing its debt obligations is the only way to give Detroit a fresh start, to let it provide essential services again. That’s the point of reorganizing through bankruptcy.
Chicago has a stronger, more diverse economic base than Detroit. But Chicago’s debts, especially its public-pension debts, far exceed those of Detroit’s. Based on a ratio of pension liabilities to revenue, Chicago is much worse off than Detroit.
As the Chicago Tribune has documented in its “Broken Bonds” series, Chicago has issued billions of dollars in long-term debt backed by property taxes for basic operating costs.
Chicago’s pensions have a $19.5 billion unfunded liability. Without pension reform, the city will have to come up with an additional $600 million for its police and fire pensions.
Chicago is looking at crippling tax hikes or service cuts if it doesn’t get pension changes.
The situation is even more acute at Chicago Public Schools. The school system faces about a $1 billion deficit next year, largely driven by rising pension payments. CPS exhausted its reserves to help close a massive budget gap this year.
CPS’ pension payments in its 2013-14 budget tripled to $613 million. The system faces an estimated $740 million pension payment in the next budget. That estimate just jumped by $110 million because the teachers pension system lowered its anticipated rate of return on investments.
Illinois can’t declare bankruptcy. We hope that the reforms approved this week give the state at least a fighting chance to repair its disastrous finances. A lot more discipline will be needed.
No one is talking, publicly at least, about bankruptcy for Chicago or its school system. But without pension changes, they’re on course for a financial disaster. It’s time for union leaders to recognize that – and to level with their members about the real risks they face if they don’t cooperate on pension reform.