Analysis: If only Daley hadn’t punted pension crisis to Emanuel
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Eight years ago, then-Mayor Richard M. Daley created a 32-member commission drawn from labor, business and banking to confront a problem that threatened to choke future generations of Chicago taxpayers: underfunded city employee pension funds.
Daley said then that the comprehensive solution he was seeking could include everything from benefit reductions and increased employee contributions to a higher retirement age and a shift away from “defined benefit” pension plans and toward the “defined contributions” or 401(k) plans favored by private industry.
“I hope it’s controversial. It has to be. If it’s not controversial, then it’s not worth anything. A lot of people will not be happy,” Daley said then.
It wasn’t controversial. Daley wouldn’t let it be controversial. Instead, it turned out to be an exercise in political avoidance.
After two years of study, the commission concluded that reduced employee benefits, higher worker contributions and “new revenue” would be needed to bail out four city employee pension funds then due to run out of money by 2030.
But there were no specific recommendations about what revenues to raise. Just a definition of the gaping need.
To reach a 90 percent ratio over 50 years — assuming annual investment returns of 8 percent — would then have required $710 million more each year. Sixty percent of that would have come from taxpayers, 40 percent from city employees.
Without benefit reductions, it would have required the equivalent of a 52 percent increase in the city’s property tax levy and 8 percent more from city employees. With benefit reductions, the annual gap could be reduced to $510 million, the report stated.
Daley responded by declaring that Chicago taxpayers could not afford to solve the city’s pension crisis. He refused to explain how he planned to defuse the financial time bomb. Instead, he let it keep ticking.
“Taxpayers are wondering, ‘Am I on the hook?’ And I say, ‘No, you’re not on the hook.’ You’re not gonna go and ask the taxpayer for $10,000 a year for the next 10 years,” Daley said then.
Daley said then it was no surprise that the panel had recommended “new revenue sources” to solve the crisis.
“No kidding. It’s called money,” he said. Asked whether that meant higher taxes, he said, “I’m not saying that . . . I’ll read the full report, sit down with all the unions . . . and make sure they’re part of the solution.”
The report sat on a shelf gathering dust. That allowed the pension debt to balloon into the full-blown, $33 billion crisis that it is today, under new accounting rules that enlarged the figure.
As a result Chicago’s bond rating has been reduced to a junk status shared only by Detroit among the nation’s major cities. That has cost Chicago taxpayers tens of millions of dollars in penalties and higher interest rates.
Moody’s Investors managing director Naomi Richman has warned that Chicago won’t shed its junk bond rating until its massive pension debt stops growing. And that would take $1 billion or two more property tax increases to match the record $588 million hike Emanuel imposed last fall for police and fire pensions and school construction.
“It’s letting the problem get worse at a slower pace,” Richman said of the record increase.
At the time Daley appointed his commission, pension obligations were costing the city $475 million — more than 15 percent of Chicago’s corporate budget.
Now, nearly every dollar of Chicago’s annual $1.2 billion property tax pot is gobbled up by debt and pensions. That leaves nothing to bankroll city services.
That’s the crisis that Mayor Rahm Emanuel inherited. That’s the crisis he’s now trying to solve with his new plan to save Chicago’s largest city employee pension fund and replace an earlier deal less costly to taxpayers overturned by the Illinois Supreme Court.
For five years, Emanuel has criticized and reversed virtually every move Daley made without ever mentioning his political mentor by name. That’s the political bargain the two men made.
But it’s clear that the problem Daley allowed to fester is the problem Emanuel is trying desperately to solve.
And the bitter pill Chicago taxpayers are now being asked to swallow is a whole lot stronger than it would have been if only Chicago’s longest-serving mayor hadn’t put his head in the sand and punted.