This article first appeared at The McAlvany Intelligence Advisor on Wednesday, April 8, 2015:
In Tuesday’s mayoral runoff in Chicago, voters had only two choices: to vote for the venal Rahm Emanuel or the feckless Chuy Garcia. Four years ago Emanuel rode Barack Obama’s coattails to victory, winning in a walk with 55 percent of the vote. In February, Emanuel couldn’t squeeze out a majority, getting only 46 percent of the vote and forcing a runoff with a far-left progressive on the Cook County Board of Commissioners, Jesus “Chuy” Garcia.
With the help of an estimated 100 “friends of Rahm,” Emanuel buried Garcia, raising some $30 million for his campaign, eight times what Garcia was able to raise. On Monday Emanuel held an 18-point lead over Garcia.
Garcia was hoping for a miracle. He had enlisted some 5,000 supporters to go door-to-door to get out the vote while spending the rest of his campaign’s paltry resources in attacking Emanuel for being “Mayor 1%,” and a tool of wealthy liberals. His platform consisted of promising to reopen some of the under-performing schools that Emanuel closed, removing the red lights and cameras that raised millions in revenues by catching speeders, and hiring another 1,000 police officers.
Of course, when pressed on just how Chicago, already broke, running deficits, and owing $20 billion to its grossly underfunded pension plan, could afford these things, Garcia was remarkably opaque.
Emanuel, on the other hand, had played out his hand over the last four years, nibbling around the edges of the city’s monstrous overhang of debt while doing little of substance. And what little he proposed was met with stout resistance from the affected parties. When he closed 49 under-performing schools, the teachers’ union went out on strike. When he proposed that city workers pay more for their benefits and retirees suffer a modest reduction in benefits, their unions went to court. That lawsuit has gone to the state’s Supreme Court where the best guess is it will rule against Emanuel. When he installed red lights and cameras to catch speeders, Emanuel managed to offend everyone else.
Emanuel’s ace in the hole, issuing general obligation bonds to cover the city’s shortfalls, was exposed thanks to the Chicago Tribune in its unnerving and infuriating report titled “Broken Bonds.” It turns out that this was a strategy refined and honed by the previous mayor, Richard Daley. GO bonds didn’t need to get taxpayer approval. In fact taxpayers didn’t even need to know about them. So Daley issued and sold nearly $10 billion worth of them, spending precious little on actual capital improvements and the rest just in catching up with overdue bills, legal costs, judgments, settlements, overdue paychecks, along with such necessities as Palm Pilots for his workers. This strategy, called “Scoop and Toss,” has simply managed to pile debt onto debt and interest costs rising as a result. Today, interest on those GO bonds eats up a breath-taking 63 percent of all property tax revenues!
When Moody’s learned of the strategy, it dropped Chicago’s credit rating an astonishing 3 levels overnight, while promising another reduction in the near future.
Emanuel was creative, though, squandering tax breaks offered by the city council to companies to come to the already thriving and prospering Loop instead of offering them to help revive the South side. There, in West Englewood, for instance, a third of the households live below the poverty level, while in Riverdale more than 60 percent of them do. South side unemployment runs between 25 and 35 percent partly because the people who would like to work have no skills. Small business owners increasingly looking for people with computer skills aren’t hiring there.
The elephant in the room that no one wants to talk about is the city’s grossly (and some say fatally) underfunded pension plan. Most private plans are required to maintain 100 percent in reserves to meet future obligations. Municipal plans like Chicago’s are allowed some leeway, so it is held, because shortfalls can always fall back on the taxpayer. So those plans are considered fully funded at 80 percent.
Chicago’s is 36 percent – and falling, thanks to demography and the Federal Reserve. As the workforce ages, more and more are getting out as fast as they can before the plan goes into default. And investment advisors are unable to meet investment assumptions as the Fed continues its policy of keeping interest rates near zero.
More than $1 billion of Chicago’s $8 billion annual budget is going into that failing pension plan, with estimates that, in order to keep it solvent (much less fully funded), in five years it will take $2 billion. That’s one quarter of the city’s entire budget just to keep its pension plan afloat.
So how did Chicagoans decide whom to vote for yesterday? The rascal whom they know, or the rascal without a clue but expressed good intentions?
Chicago is in for another rough four years. Perhaps it will take the honors of being financially the worst run city in the country, the position currently held by Detroit.
National Journal: Broken City: Rahm Emanuel and the unraveling of Chicago.
Chicago Tribune: Background on “Scoop and Toss” borrowing strategy in Chicago