A $500 million property tax increase will not be enough to solve Chicago’s $30 billion pension crisis or rid the city of the junk bond rating that has saddled the taxpayers with tens of millions in penalties and borrowing costs, analysts concluded Tuesday.
Civic Federation President Laurence Msall and Matt Fabian, a partner at Municipal Market Analytics, offered the grim assessment during a lively panel discussion on city finances before a packed house at a City Club of Chicago luncheon.
The title of the discussion was: “Fiscal Cliff: What’s Next for Chicago Finances.”
Fabian’s conclusion was that, as tough as it will be for homeowners and their aldermen to swallow a $500 million property tax increase, Mayor Rahm Emanuel and the City Council need to bite the bullet even harder.
“I would have preferred to see this as the first of several property tax increases and part of a more aggressive plan. Say, $200 million or $300 million every year for the next three or four years as opposed to one large one because one large tax increase can create political volatility,” Fabian said.
“The political cost of a $500 million raise probably makes this the only revenue raise — at least the only significant one that we’ll see in the near term. And that’s just not enough. So, either it means much deeper spending cuts or a return to gimmicks, particularly if the economy softens.”
Fabian acknowledged that Chicago bonds have been “trading up a point or two for the first time in quite a while” since the Chicago Sun-Times first disclosed last week that Emanuel is poised to raise property taxes by a record $500 million for police and fire pensions and school construction and impose a first-ever garbage collection fee.
But he argued that it will take a lot more than that to rid Chicago of its costly junk bond rating.
“The city could have $1.5 billion [worth] of increases and it would still be [just] almost enough. We’re still very far from [the solution] because the full cost of the pensions for the city and the school district are enormous,” Fabian said.
A $500 million increase “helps the markets take comfort that there’s some positive momentum — that the city is working on the problem and isn’t continuing to make it worse. But the city’s cost of borrowing won’t see a material [drop] until it loses the non-investment grade rating. And it’s not going to lose that rating until it makes much more progress than this,” he said.
Msall agreed that a $500 million increase that would be Chicago’s “largest in modern history” is “not the full answer and it’s not going to be enough because we’ve dug the hole so deeply” by underfunding pensions and granting benefits that taxpayers cannot afford.
“We are going to have raise taxes very significantly just to pay the interest on the debt we have built up and it’s not going to be enough to save the city of Chicago,” he said.
Msall noted that Emanuel has made three rosy and risky assumptions that may turn out to be incorrect.
The first is that an Illinois Supreme Court that has already overturned state pension reforms will uphold the mayor’s plan to save the Municipal and Laborers pension funds.
The second is that Republican Gov. Bruce Rauner will sign legislation — approved by the Illinois House and Senate, but not yet on the governor’s desk — giving Chicago 15 more years to ramp up to 90 percent funding levels for the police and fire pension funds.
And the third is that the Chicago Public Schools will get $480 million in pension help from a “dysfunctional” Illinois General Assembly that “doesn’t want to help” because Democratic leaders are embroiled in a state budget stalemate with Rauner over Rauner’s demand for pro-business, anti-union reforms.
“That’s the unit of government we are most frightened for: the Chicago Public Schools. To pass a budget with a half a billion hope . . . and then start spending as if that relief is already here makes us very nervous. It makes us wonder what happens if there’s any hiccup economically how the Chicago Public Schools will go on,” Msall said.
Unlike Fabian, who reiterated his four-month-old claim that Chicago has a “revenue problem,” Msall argued that Emanuel has not been nearly as aggressive as he needs to be in cutting costs.
He talked about Chicago having too many pension funds and too many firehouses that both need to be consolidated.
“He’s driven some efficiencies, some reductions in spending. But, it’s not enough. More needs to be done. The public is not convinced that we’ve rung the inefficiencies out of our local government,” Msall said.
“We have a big problem. And one of the biggest problems is not the tax increase, but it’s the reaction to the tax increase. If businesses and people do not think that there’s hope at the end of the tunnel, that this thing is going to work, that we’re going to stabilize our government, that we’ve done enough, that we’re going to change our bad practices, they’re going to leave.”
Chicago’s Chief Financial Officer Carole Brown, who was also on the panel, countered that the mayor’s budget will include $170 million in budget cuts, reforms and efficiencies.
Brown also reiterated Emanuel’s promise to raise property taxes, only for police and fire pensions and soften the blow with “fair and progressive” relief for seniors and working families.
“We would not ask those who can least afford to bear the cost of a potential property tax increase,” she said.
Pressed on how City Hall would go about protecting those who can least afford to pay, Brown said, “It’s one of the principles of the mayor. It’s something we’re still working on and will have for his budget address.”