Rahm Emanuel’s financial legacy: He left the city better off than he found it

Six weeks before choosing political retirement over the uphill battle for a third term, Mayor Rahm Emanuel talked openly about what he hopes will be his financial legacy.

Whoever succeeded him, he believed, would say, “‘Thank God that mayor did that so I don’t have to do it,’” Emanuel told Economic Club Chair Mellody Hobson, his longtime friend and campaign contributor, in a frank chat last year.

Emanuel may someday get his wish; history may judge him as the gutsy savior who pulled Chicago back from the brink of bankruptcy.

But he’ll probably have to wait awhile. That’s because taxpayers likely will need time to forget the $2 billion price they had to pay to help their retiring mayor chip away at the rock that is Chicago’s $28 billion pension crisis — a problem decades in the making.

Emanuel weathered that political storm to identify dedicated revenue sources for all four city employee pension funds.

He more than doubled Chicago’s property tax levy for police, fire and teacher pensions; pushed through two telephone tax hikes for the Laborers pension fund and phased in a 29.5 percent surcharge on water and sewer bills to bankroll the Municipal Employees pension fund, the largest of the four.

He persuaded the Illinois General Assembly to give the Chicago Public Schools a $450 million cash infusion and bankroll teacher pensions going forward.

But, even with all of that — and hundreds of millions more in tax, fine and fee hikes and budget cuts — Chicago is not out of the woods.

Mayor-elect Lori Lightfoot is staring down the barrel of an immediate $277 million spike in pension payments — payments that will rise another $1 billion by 2023 as the ramp to actuarial funding ends and the road to 90% funding begins.

The corporate fund has a two-year gap of at least $613.9 million — even before the cost of police and fire contracts and retroactive pay raises for the rank-and-file are factored in.

The mountain of debt heaped on Chicago taxpayers continues to climb, with debt service payments to match. So do settlements and judgments tied, primarily, to allegations of police wrongdoing.

No wonder Lightfoot came away from a meeting with Emanuel’s financial team calling the situation infinitely worse than she anticipated.

Unfinished business

The bottom line is that, for all the political capital he risked and spent, Rahm Emanuel did not stick around long enough to finish the job.

“He is leaving the city in better financial shape than he found it. He faced enormous challenges,” said Civic Federation President Laurence Msall.

Msall acknowledged even he was surprised by the “level of borrowing” Emanuel inherited and by how much of that borrowed money was being used for city operations.

“The mayor committed to getting rid of scoop and toss, a very expensive way of pushing out your debt. He promised to stop borrowing for large settlements and began to stabilize the pension funds,” Msall said.

“But every time he tried to do something to the pensions — whether it’s add a new revenue source, change the funding schedule, change benefits or create a new level of benefits for new employees — he needed approval from Springfield.”

Pressed to articulate Emanuel’s unfinished business, Msall mentioned inadequate cash reserves, a $500 million-plus mismatch between expenses and “structural revenues” and a pension crisis exacerbated by an automatic, 3% compounded cost-of-living increase for retirees.

“When you have city pensions that are, in total, about 30% funded, that’s a huge crisis. The mayor put more money into the pension funds, raised taxes to do it, got some reforms — but not as much as necessary to bring down the liability,” he said.

Textbook examples

Ralph Martire, executive director of the Center for Tax and Budget Accountability, called Emanuel the “most responsible mayor we’ve had on fiscal policy” in decades.

That’s in part because Emanuel followed the advice outlined in the textbook Martire uses to teach a master’s course on tax policy at Roosevelt University. Chapter Two is “The Politics of Revenue.”

“It literally says, ‘If you’re gonna get a major tax increase passed, first you do all of these things that Rahm Emanuel did. … I’m not gonna fill open positions. I’m gonna cut spending. … I’m gonna live within my means so that, when I put this tax increase on the table in my second term, I can justifiably say it was the last resort,’” Martire said.

“If I’m gonna fault him on anything, it’s that he knew this ramp-up was coming. I would have gone for a larger tax increase because you expend the same political capital.”

Some of Emanuel’s early economies backfired badly.

He balanced his first budget by eliminating more than 1,400 police vacancies, reducing police and detective areas from five to three and closing three district police stations: Wood, Belmont and Prairie.

When homicides and other violent crime spiked, Emanuel was forced to rely on runaway overtime before reversing field and embarking on a two-year plan to hire more than 1,000 additional officers.

Some problems passed along

That’s another hot potato passed to Lightfoot. Police salaries rise dramatically after 18 months on the job. She’ll have to figure out how to absorb those fast-rising costs.

Martire also took issue with Emanuel’s decision to spend the first of his two terms trying to negotiate pension reforms that were ultimately overturned. The Illinois Supreme Court upheld a pension protection clause that says those benefits “shall not be impaired or diminished.”

That triggered a downward spiral that saw Moody’s Investors lower Chicago’s bond rating to junk status and do the same at the Chicago Public Schools and Chicago Park District. Standard & Poor’s and Fitch announced lesser drops.

“I don’t think any of that pursuit of cutting benefits was time well spent. It was unconstitutional on its face. [And] even if could you get it done, you’re not gonna solve the problem. When you look at what’s the real cause of the fiscal stress, it’s clearly paying back what was under-funded in the past rather than the cost of the benefits,” Martire said.

Emanuel might have accomplished more by attempting to cut a pension deal with Democratic Gov. Pat Quinn and a Democratic-controlled Illinois legislature.

The failed strategy became even more glaring when Emanuel’s once close friendship with Quinn’s successor, Bruce Rauner, deteriorated into a bitter, four-year feud.

CPS was on the brink of bankruptcy before an override of a Rauner veto finally ended the state’s marathon budget stalemate.

How teacher contract was won

In a recent interview with the Chicago Sun-Times, Emanuel touted the flexibility he showed after first trying to negotiate a contract with the Chicago Teachers Union that included the equivalent of a 7% pay cut for all teachers.

When then-CTU President Karen Lewis “couldn’t sell it,” Emanuel said he “recalibrated” to end the “pension pick-up” — but only for new hires. Years ago, in lieu of a pay raise, CPS had instead begun making teachers’ 7% pension payment for them.

“Did I give a little? Yes. Did we end up with the down payment to get the ultimate goal?” Emanuel asked aloud, before answering in the affirmative.

“The ultimate goal was to create a context so the State of Illinois did something it had never done for a hundred years, which is treat the Chicago teachers, students and taxpayers equally. …The school [funding] formula — rewriting it and doing it — had been debated for 60-plus years. We finally resolved it. That’s why last year, Chicago Public Schools ended with a surplus. Upgraded from all the credit rating agencies. The finances don’t affect the classroom anymore.”

Rauner made life even more difficult for Emanuel by vetoing a bill that gave Chicago 15 more years to ramp up to a 90 percent funding level for police and fire pensions.

That forced the city to use $220 million in “short-term bridge” financing to make a state-mandated payment to police and fire pension funds; that payment was higher than Emanuel’s tax-laden 2016 budget had assumed it would be.

Three Republican crossover votes in the Illinois House helped Emanuel override the governor’s veto, staving off yet another property tax increase.

It was a stunning victory that Emanuel burned the phone lines to achieve — but only by forfeiting the chance to get other cost-saving concessions from police and fire unions in exchange for their support for the longer ramp.

A few rabbits of his own

For all his talk of eliminating asset sales like the widely despised parking meter deal and other “gimmicks that former Mayor Richard M. Daley used to mask the true cost of government,” Emanuel pulled a few rabbits of his own out of the hat.

He used an $87.5 million tax-increment-financing (TIF) surplus to stave off another teachers strike.

He balanced his last two budgets with, in part, savings generated by having isolated sales tax revenue in a special fund and using that “securitization” structure to refinance $3 billion in city debt.

On his way out the door, he even proposed a $10 billion pension borrowing plan to ease the pain of post-election tax increases by “as much as $200 million” in his successor’s first budget.

Emanuel’s ordinance setting up the structure for a pension borrowing never got a City Council hearing, let alone a vote.

Still, Martire said Emanuel deserves to take a bow.

“He did attempt to attack structural issues with structural solutions. He didn’t go to the frequently used political sop of selling off assets to plug holes,” Martire said.

“Do I wish he’d have acted sooner? Do I wish he had gotten a little bit more on the tax increase? Would it have been better if we utilized pension obligation bonds sooner? Yes, yes and yes. But you could say all that as criticisms and ignore the fact that he’s still the only guy that actually put his neck out and passed tax increases and dealt with the structural issues in a long-term structural way.”

‘The chickens have to come home to roost’

Two years ago, Inspector General Joe Ferguson urged Emanuel to seize a “generational moment for Chicago” — by renegotiating union contracts to cut costs and improve city services.

If the mayor had followed the script, Chicago police officers would have been squeezed with tighter rules on secondary employment and an end to cash payouts for accumulated compensatory time upon retirement that constituted a $259 million liability.

Ferguson also urged the mayor to re-examine a host of contract sweeteners, including uniform allowance, tuition reimbursement, duty availability pay and the quarterly differential pay for police sergeants, lieutenants and captains.

Firefighters and paramedics would have been impacted by some of those changes, as well as by Ferguson’s renewed request to take a fresh look at the minimum manning requirement that triggered the bitter 1980 firefighters strike.

None of that was accomplished on Emanuel’s watch. In fact, the mayor punted police and fire contracts to Lightfoot.

“There are certainly a lot of things that, in our reports, we put on the table as opportunities for savings, efficiencies, better ways of collaborating that still sit there as things that are opportunities,” Ferguson said. “We’re now approaching 20 years of a structural deficit. At some point, the chickens have to come home to roost.”