Posted September 4, 2015 12:22 am by Comments (15)

Why Chicago’s $500 Million Property Tax Increase Won’t Solve Much – WP Original
Print Friendly

 

By: Mark Glennon*

 

You’re dead wrong if you think the $500 million property tax increase now proposed for Chicago, the largest in its modern history, will solve much of its pension and fiscal crises. It won’t come close. You need look no further than the city’s own financial statements to see why.

 

Chicago’s 2014 Comprehensive Annual Financial Report was released in July (after the June 30 deadline required by law). Page 83 shows that, for the year ended this past December, Annual Pension Cost for the city’s four pensions was $1.788 billion. Total contributions made to those pensions were $447 million. The difference of  $1.34 billion is how much the city underfunded the pensions.

 

In other words, it would take a $1.34 billion tax increase, not $500 million, just to start funding Chicago’s pensions adequately. Throw in another $150 million or so for the garbage collection fee, sugary drink tax, Uber tax and e-cigarette tax the city is also considering and you still don’t get nearly enough to fund pension promises made.

 

Are those numbers right? They’re almost exactly the same as Standard & Poors told us in February in a report that went entirely unnoticed (except here). Using a slightly different approach, they said the city was contributing 26% of its Annual Required Contribution for the four plans. That implies that the true contribution should be $1.7 billion.

 

That’s just for the four pensions of the city itself. Never mind the Chicago teachers pension, six other municipal pensions that overlap Chicago and the five statewide pensions. And never mind the other structural deficits a tax increase must also cover.

 

But real numbers didn’t stop the usual tax-increase-solves-everything crowd. Rich Miller immediately celebrated news of the proposal with the headline, “Chicago finally talking about putting some real skin into the game.” Greg Hinz at Crain’s wrote, “the city finally is dealing wholly and completely with the problem—or so it appears…. No more assuming Gov. Bruce Rauner and the General Assembly will act…. No more funding of pensions at less than the actuarially required level.” And Rahm defended the increase with this:

 

All the gimmicks and shenanigans that were built up in the system to mask what the real cost of our government was…will be out of the system. And we will have finally righted our financial ship…. As it relates to police and fire pensions, we will also put that on a [stabilizing] course to respect the hard work of the men and women who protect us every day.

 

Nonsense. How can they or anybody embrace a tax increase that’s so clearly futile?

 

One reason is almost everybody focuses only on the annual pension contributions required under state law. Those numbers mean nothing. They underfund the pensions even if made in full. In Chicago’s case, S&P is right — Chicago made the payments Springfield orders but they’ve covered only 26% of true cost. And, no, the higher annual pension contributions for this year and next that everybody is fretting about are still just a fraction of true pension cost. The real cost goes unfunded and accrues as debt. The focus should be on what the accountants are now calling APC — Annual Pension Cost — which is that $1.788 billion number in Chicago’s financials. By the way, those numbers, too, are full of optimistic assumptions and are easily manipulated.

hole

 

Chicago’s tax increase will go down a nearly bottomless pit. Same for any other Illinois municipality with a pension crisis. You’ve seen the madness before. Ninety percent of revenue from the temporary state income tax increase went to pensions. 90% of the Cook County sales tax increase is expected to go to pensions.

 

Taxpayers should insist on this: Not one dime of new taxes absent radical reform to eliminate the causes of the crisis and an honest accounting of how large a problem we face.

 

*Mark Glennon is founder of WirePoints. Opinions expressed are his own.

 

 

 

 

 

 

 

Sort by:   newest | oldest
Anonymous

Greedy public unions. Let them go broke. The taxpayers deserve better.

Peter A Quilici

When Steve-Oh mentioned the Chicago Firemen’s plan, I recalled a news story several years ago stating that the Firemen wanted some relief from property taxes because they were required to live in Chicago. I don’t recall if the CPD piled on.

If Mayor Emanuel is serious about a historic property tax increase, will the CFD again seek some sort of relief? That would be interesting.

Perhaps, a historic property tax increase along with other “contributions” are required to wake up the disengaged. I can hope.

mark glennon

Steve- That’s a very important point that should be emphasized. Even the APC numbers in the CAFR are phony and understate the true liability.

Steve-Oh
Here’s editorializing from a “friend”: What a fiasco. If just INTEREST on the unfunded accrued pension Liability is 1.5B/year — nearly 50% of payroll — then Rahmbo’s belief that add’l taxes of .5B/year are needed (which BTW is 17% of govt ‘ees payroll) is even much too small. That’s much less than what’s really “needed”. But still, they’re trying to get to 1.8B contrib/year, or about 50% of payroll. It can be shown that roughly 2.6B/year is the amount actually required. What a joke on the non-govt workers who are supposed to pay for this under the ILL (and CALIF… Read more »
mark glennon

Steve- Comments from actuaries like you are especially welcome, whether pro or con, so please continue on other pieces. On technical matters I validate what I write with actuaries, but some of them need to remain anonymous. So, public validation from folks like you is important.

Adam

Mark: What radical reform to the pensions are you talking about? The courts have already shot down any possible reform so why do you keep bringing it up? It is obvious that the pensions will have to run out of money completely or be near running out for any true reform to be done. Until then I say they should simply let them run dry and no longer increase any taxes for the pensions. Bankruptcy is all that is truly left and writing about reform before that is fruitless and pointless. Thoughts?

Steve-Oh

Adam: 1st the state Constitution should be changed, and not in a mealy-weasel way. Should be changed to not say anything about govt pensions

Adam

Even if it is changed it has been stated over and over it only changes future pensions,not current ones. That will not work. Bankruptcy is it.

mark glennon

Adam- That’s probably not true. All state constitutional issues can be disposed of by a properly drafted amendment. That leaves only the contracts and ex post facto clauses in the US Constitution to deal with. The answer there is unclear, but it would be hard to see this US Supreme Court invalidating pension reform on that basis.

Anonymous

Well, that is music to my ears. Mark: you do agree in the end the pensions will be be cut no matter what? I mean, Illinois will not be allowed to collapse. I think in the end the Federal Goverment will have to step in for most states anyway at some point that need help with this issue. If not, it will lead to the US itself being in collapse.

Anonymous

Something has to give, and soon. Illinois is moving at a snail’s pace with facing reality and will collapse if bankruptcy is not allowed in the next five years. It is fact.

mark glennon

Adam- Yes, I should probably write up a list of what at least I, personally, would consider to be the list of reforms that should come before tax increases. It would be huge, and include many concurrent efforts. In the case of Chicago pensions it would include, as one alternative, just what you said — let the old pensions bleed out and supplement them where necessary with a new, affordable plan. I’ve written before about why that’s viable because the city should not be held liable on the underlying pension obligations.

Steve-Oh

Mark: Forgt to say……great article !! You should send it to the Trib and SunTimes. They should print it on page 1 for the private sector taxpayers to read. They’re supposed to be the citizens’ watchdog……but for decades they’ve been the govt’s mouthpiece

Steve-Oh
Yes, $1.8B is the Annual Pension cash Contrib= APC, by THEIR weak method of calculation. I’d think the true minimum they “should” be contributing (if they were foolish and brazen enough to try to tax citizens further into oblivion!) is 1.5B which is just INTEREST (at their 7.5%) on the 20B Unfunded LIab……..plus SOME principal, say 1/30th just to show they’re serious about eventually TRYING to pay off the Unfunded…….that’s another .6B……..plus Normal Cost that’s NOT shown in the report but certainly would be at least 15% of Payroll I’m guessing, which would be .5B……..add those 3 pieces and you… Read more »
wpDiscuz