That Was a Promise!
Sorry, there is no money to pay it.
In September, Rahm Emanuel surprised the political cognoscenti when he announced that he would not be running for re-election as mayor of Chicago, where it had been routinely assumed that he’d win a third term.
Emanuel was a big-city mayor of national stature with a near-pure political pedigree that included a stint as a Clinton White House “leg-breaker,” and four terms in the House of Representatives. He also served on the board of Freddy Mac, where he failed to see the housing crash coming and turned a nice dollar, but not as nice as the one he turned handling mergers and acquisitions at investment firm Wasserstein Perella.
Emanuel talked tough and dirty which, in the days before Trump, was considered sort of colorful. There was informed speculation that he might even, one day, run for president. And why not? If he could govern Chicago, then running the country ought to be easy work. So why did he choose not to run?
Could it have been the murder rate in Chicago, where the papers run weekend body counts and put the blame on Indiana for its less-than-draconian gun laws?
This seems unlikely. Chicago is a famously tough town where the St. Valentine’s Day Massacre is treated as a sort of charming bit of cultural history. Chicago without gangs is as unimaginable as New Orleans without crawfish. Emanuel had nothing to fear on the “law and order” political front.
One suspects that, as on so many matters, his problems were with money.
Still, when the mayor made his farewell speech on the city’s finances on October 17, he bragged about what had been accomplished in his two terms in office and indulged in a bit of self-pity over not getting the kind of credit he believed he deserved:
One thing I have learned is that they do not build statues for people who restore fiscal stability,” he said. “But without sound, strong, stable finances, nothing else is possible.
In a way, this was a legitimate beef. He had tried to make Chicago fiscally healthy. His administration had, after all, raised taxes in six of his first seven years. And raising taxes is the most unpleasant duty a politician can perform.
And then there are the schemes workers in the public sector routinely employ to inflate their pensions… People are fed up with financing bad decisions made before they were old enough to vote.
Still, his administration did the necessary and jacked up the 911 phone tax, taxes on Uber and other ride-sharing outfits, amusement taxes (which is sort of amusing when you think about it), taxes on water, sewer, and similar services (which almost certainly amused nobody), and property taxes. He also raised garbage fees, cable taxes, city vehicle sticker fees, and parking garage taxes.
It has, in short, grown vastly more expensive to live in Chicago during the time Emanuel has been mayor.
And yet, with all that new money coming in, the city’s bonds are rated as junk.
Once upon a time, this would have been written off to graft and corruption – fundamental political skills in Chicago – as in most big cities run by (Democratic, usually) political machines. But Chicago faces a $28 billion hole, and not even the most crooked politician could steal that much.
That $28 billion represents “unfunded pension obligations.” These are promises made before Emanuel was elected mayor but for which he and those who will come after him are on the hook.
This looming debt is so formidable that Emanuel did not even mention it in his October farewell speech. But denial is an understandable reaction to unfunded pension mandates which loom over not just Chicago but cities and states from sea to sea. And the numbers are truly staggering. So large that it is possible to think, “Well, there is no way, no possible fix,” and just ignore the whole business.
So how should we think about the problem?
Perhaps the best way is to start at the beginning and the end… simultaneously.
We got here because we failed to heed the warning of a great Democrat, Franklin Roosevelt, who once warned that a “…strike of public employees manifests nothing less than an intent on their part to obstruct the operations of government until their demands are satisfied. Such action looking toward the paralysis of government by those who have sworn to support it is unthinkable and intolerable.”
Turns out that strikes by, say, schoolteachers are quite “thinkable.” They happen all the time and the citizenry has learned, more or less, how to tolerate them. Public-sector unions have, as we all know, led to a prosperous public-sector workforce where the civil service protections are stern and the benefits are generous.
As punishment for my sins, I once served a term on my local school board and was obliged to negotiate a new contract with the teachers’ union. I was shocked to learn that the teachers wanted to add chiropractic and similar services to their health care plan, for which they paid almost nothing. The demand for chiropractic coverage did not come out of a sudden epidemic of arthritis among the faculty. It was, rather, just about the only thing left to add to the teachers’ gold-plated plan.
When public-sector employees are already being paid more than their counterparts in the private sector (where people are held accountable for performance and can actually be fired), their unions turn their sights to what they will earn when they are no longer working.
That is to say, to pensions.
It’s easy for those on the other side of the table to promise ever fatter pension benefits. By the time the bills come due, the officials who made the commitment will be out of office and fishing the surf for pompano in sunny Florida… which pretty much describes the situation that Rahm Emanuel faced in Chicago.
Previous administrations had made big pension promises without adequately funding them. An insufficient amount of money was put away for funding, and in the zero-interest regime that followed the Great Recession, it did not return anything close to enough. Thus, the $28 billion hole.
Mayor Emanuel might find some solace in the fact that he is not alone. Pension liabilities are a threat to government solvency in many, many jurisdictions, including his own state of Illinois where the hole is about $140 billion deep – about $11,000 for every man, woman, and child who has not yet fled the state.
Meanwhile, Illinois keeps on digging.
The people with the shovels like to console themselves with thoughts of 7% and 8% returns on what they’ve set aside. This is another of those fairy tales that people in the business of politics tell themselves.
Joshua D. Rauh of the Hoover Institute has run the numbers:
As of ﬁscal year 2015, the latest year for which complete accounts are available for all cities and states, governments reported unfunded liabilities of $1.378 trillion under recently implemented governmental accounting standards. However… using market valuation techniques the true unfunded liability owed to workers based on their current service and salaries is $3.846 trillion. These calculations reﬂect the fact that accrued pension promises are a form of government debt with strong rights. These unfunded liabilities represent an increase of $434 billion over 2014, as realized asset returns fell far short of their targets.
Pensions are not short-term obligations. Public-sector employees routinely retire after 20 years on the job. Their retirements, during which time they will collect pensions, can easily last longer than that. And there will be more of them every year. Governments will be obliged to pay more and more for work that was done further back in history, though probably not quite matching the 150 years that the federal government found itself on the hook for in the case of Irene Triplett – the daughter of a Civil War veteran – who, in 2017, was still collecting $73.13 each month from her father’s military pension.
But this qualifies as a curious one-off and, anyway, we can probably afford it.
The pensions for our current crop of governmental heroes can, on the other hand, be generous and even lavish. And in some cases, they are outrageous. As reported by the New York Times, Oregon’s pension payment to an eye surgeon who retired as president of the Oregon Health & Science University comes in at $76,111.
That would be per month.
There are similar cases – if not quite so outrageous – from across the country. And then there are the schemes workers in the public sector routinely employ to inflate their pensions: banking sick time, increasing overtime in the last year before retirement, and so forth. It’s how our “public servants” roll.
But sooner or later, reality will assert itself in the form of the Herb Stein Law, which states simply and eloquently:
If something cannot go on forever, it will stop.
In the case of Illinois and Chicago, that time appears to be closing in. According to one study by public-policy watchdog LGIS:
At the end of 2020… the Policemen’s Annuity and Benefit Fund of Chicago will have less than $150 million in assets to pay $928 million promised to 14,133 retirees the following year.
Well, one thinks, maybe the city could just stiff the retired cops – declare bankruptcy and let the courts sort it out.
But not so fast there. While federal bankruptcy law appears to permit municipal bankruptcies, Illinois law does not. Furthermore, the Illinois constitution protects workers’ pensions. So…
Chicago must pay retired policemen, schoolteachers, and various others the pensions they were promised. Which means, of course, that the money has to come from somewhere.
And where, one asks, would that be?
That answer would seem to be… the usual.
But as the state of Illinois is learning, taxpayers will not stand still to be skinned forever. With the compounding of the state’s fiscal woes, more and more of its citizens are packing up and leaving for jurisdictions that are less profligate and corrupt. The city will miss them since it needs as many people as possible paying those amusement taxes. But in 2017, Chicago’s population declined for the third year running. It was, in fact, the only city among the nation’s 20 largest to experience population decline over the year.
People are, as they say, voting with their feet. They are fed up with financing bad decisions made before they were old enough to vote. Illinois and Chicago can sink into destitution without them. Please forward the mail to one of the several states that have not bankrupted themselves by making a lot of promises they could never keep.
Those states would include, among others, Tennessee and South Dakota. Those in the same fix as Illinois (though slightly less dire) include, among others, Connecticut, New Jersey, and… California. The Golden State is in a pension hole that could be $1 trillion deep.
This is in the not-so-distant future. Meanwhile, however, there is the present. And in Chicago, this means coming up with the money to pay those pensions almost immediately lest the city be compelled to lay off today’s police officers in order to meet its obligations to retirees.
Rahm Emanuel and his team came up with a plan that is almost sublime in its predictability.
Their solution to the problem of insurmountable debt?
More debt, of course.
The plan, which Emanuel did not deal with in that speech where he talked about unbuilt statues honoring brave public servants such as… well, himself… would involve the issuing of $10 billion in bonds paying around 5.5 %. Chicago would take the $10 billion and invest it and realize a return of… oh, 7% or 8%.
Simple, right. Elegant, even.
Why didn’t someone think of this before?
Actually, plenty of people have. And it isn’t as easy as it looks. The markets have a say, and that 7% or 8% return, even in the present environment of rising interest rates, is anything but a slam dunk. Counting on such robust returns is how many state pension programs found themselves underfunded in the first place.
As former New York Mayor Michael Bloomberg, who knows a thing or two about money and municipal finance, once said, “If somebody offers you a guaranteed 7% on your money for the rest of your life, you take it and just make sure the guy’s name is not Madoff.”
Assume, then, that going more deeply into debt will not result in Chicago becoming debt-free. Assume, also, that it is merely a “walking point” and that many other jurisdictions will soon hit the pension wall.
What then? Can Chicago go broke? Well, Detroit did.
So what happens if Illinois goes down along with Chicago? And then Connecticut and New Jersey follow? And then the great state of California sinks under accumulated but unplayable obligations… markers that even Facebook and Google can’t cover.
The cry will rise for a bailout. The governors and mayors will not be asking, either. They will be demanding. The country simply cannot afford to let more of its states go down. It will be painted as a matter of national security, even survival.
But there will be plenty of people – voters, it should be remembered – in places like Tennessee and South Dakota and Florida who will wonder why they should be on the hook for promises made by politicians in states like Illinois that pay 63,000 civil-service employees’ salaries of more than $100,000 each. There are carpenters in Chattanooga who make half of that and whose retirement is their own responsibility. People who could be forgiven for thinking, “Let ‘em die.”
But… we bailed out the banks, didn’t we? And AIG? And GM? Aren’t Illinois and Chicago that important – and deserving?
Maybe. And, then again, maybe not.
Who can say what a federal bailout would look like. Citizens in states that don’t have a problem could be forgiven for expecting retirees in broke states to take a haircut. (One that leaves the scalp showing through.) Debate over the terms of any bailout would be ugly. People who face a cut in their pensions would insist that they were promised the money. That a contract is a contract.
To which that carpenter in Tennessee might answer, “But that contract wasn’t with me.”
And then there is the small matter of finding the money. The federal government is already more than $20 trillion in debt and running very large deficits during a time of full employment. Bailouts do cost money and it has to come from somewhere.
Would the country be obliged to add another few trillion to the national debt to accomplish the bailout?
These are hard questions… So hard that Rahm Emanuel threw up his hands and walked away.
Good luck to whoever comes next. Maybe he will get that statue.
Geoffrey Norman is the author of 12 books of fiction and non-fiction and many articles for periodicals including the Wall Street Journal, Sports Illustrated, National Geographic, Esquire, Men’s Journal, the Weekly Standard, and others.