How Democrats Pillaged Chicago Toward Bankruptcy
Chicago’s financial situation is the worst of any large municipality in the nation. Moody’s recently downgraded the credit rating of the city’s municipal bonds to junk status, a sure sign to investors that the city can’t be relied upon to meet its financial obligations. The city’s response to this downgrade was to pass, just a month later, another $1.1 billion borrowing program. Chicago has the most serious case of financial denial of any large city. Mayor Emanuel fiddles while Chicago burns.
Chicago did not find itself in this situation by chance, or by the 2008 meltdown, or through mismanagement. Its debt was politically created with a reckless disregard to the future financial stability of the city. Here’s a few current facts: Its debts are divided into two categories: unfunded pension debt and muni bond debt.
The pension debt is a legacy debt of its gigantic patronage system, a politically based system of hiring workers for city jobs in order that they, and their families, will support the Democrats who hired them. Today there are almost 40 politically based unions. All support Democrats.
The huge expenditure of city revenues on public workers created the muni bond debt. Muni bonds were issued for three primary reasons. One was to pay for the relentless expansion of city spending, so that more patronage workers could be hired. The second reason is to pay pension contributions for the workers. The third major reason is to finance termination payments on past muni bonds. Of the ten largest cities in the U.S., Chicago is the only one that has no statutory limit on its muni bond issuances. Consequently, Chicago’s 2015 debt service and annual pension costs amount to 45% of its 2013 revenues. The closest to this is a smaller city, San Jose, CA at 28%. The nine other biggest cities have pension and bond debt costs half of that: 22.4%.1
The structural debt of Chicago was designed to allow Party union loyalists to live half of their adult lives on pensions to which they contributed very little. The Chicago Public Schools have the authority to issue their own bonds and theirs are also at the post-crisis stage. Chicago union teachers pay nothing toward their pensions ever since they went on strike and the city agreed to pick up their pension contribution.
Since 2003 Chicago has engaged in Wall St. type financial engineering tricks to paper over its debt. That year the state of Illinois, which is closely allied with Chicago’s politicians, passed a “Financial Act” which enabled the city to refinance and put off paying its bills. The Act authorized governmental units “to enter into cap, collar, swap, or other derivative transactions related to interest rates which serve to hedge interest rate risk.” It’s important to note that these gimmicks do not enable Chicago to finance debt more efficiently, merely to lower today’s principal payments so more debt can be created for future taxpayers. The Chicago Public School system has made extensive, and some say very risky, use of the 2003 Financial Act.
A city qualifies for bankruptcy when it does not have the revenues to pay its bills. Chicago has qualified for bankruptcy for about 15 years.
Chicago is the quintessential Democrat City, and its history and fall are a warning to voters of what happens when Democrats achieve long term complete control of a major city and its finances.
Chicago’s population is now 2/3 minority, predominantly black and Hispanic. The majority of these minority residents receive federal benefits, and the school system, which relies on minority students, is heavily subsidized by the federal government. The federal government employs more people than anyone else in the six county Chicago area. This is the same situation that existed in Detroit when it went into bankruptcy. Today Chicago has the slowest growth rate of any large city.
Chicago’s Machine, having put itself into power by promising benefits to the electorate and pensions to its patronage workers, has shown the U.S. what happens when one party takes complete control: total subservience to government and a relentless grinding down of the middle class.
Currently the City of Chicago admits to having $26.8 billion of unfunded pension liability. Since there are almost exactly one million households in the city, each household owes the city $26,800 dollars to fund their pensions. And this unfunded amount grows every day. The City has six major public pension plans and they are only 50% funded. Its debt and pension payments have become such a burden that today virtually all of the property taxes paid to the City go to pension payments2 and bond debt service. The city’s operating expenses, such as police, fire, street lights, trash collection and so on, rely on high fees on such things as parking, cell phone plans, etc.
To add insult to injury the President of the Cook County Board, the county in which Chicago is located, wants to raise the county sales tax one percent and admits that ninety percent of this raise will go to public pensions: what Karl Marx would call class warfare.
For Chicago to file for bankruptcy would require an Illinois state authorization bill.
This authorization requirement is mandated by Federal bankruptcy law and Illinois’s new Republican Governor has suggested it, but the state legislature is dominated by a Democrat supermajority who drove the state into its own quagmire of $205 billion of unfunded pension debt. To this must be added bond debt.
Once started, the bankruptcy proceeding follows established federal bankruptcy law. All contracts, such as public sector pension contracts, can be changed by a federal judge. Judge Rhodes in Detroit ruled that federal law supersedes state law and that Detroit’s financial situation could be reviewed and amended by a federal judge. And the assets of the city, in this case Chicago, can be redistributed as well as future revenue streams like the Chicago motor fuel tax or sales tax.
This relentless seizure of middle class income has resulted in Chicago having the lowest economic growth rate of the ten biggest cities. While Chicago won’t suddenly slide into Lake Michigan, it is well into a deep recession that discourages population growth and economic development.
In 2014 95,000 people moved out of Illinois and Chicago’s population gained by only 82 persons. And it would have lost hundreds of thousands more in the last twenty years if not for the city’s sanctuary policy, which promoted the expensive influx of illegal immigrants and their children. The city’s public school system is now 44% Hispanic.
Chicago proves that big government and big spending programs not only do not create jobs or economic growth but they promote housing segregation, poverty, and despair. Chicago’s residents have been pillaged of far more than just their incomes. This is quite a testimony to the true character of Democrats, who rose to power with promises to pursue the beauty pageant ideals of equality, smaller class size and a greener earth.
1. What Chicago’s fiscal emergency says about the quality of credit analysis in the municipal bond market. kristiculpepper
2. How Chicago has used financial engineering to paper over its massive budget gap.