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.
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.