By: Mark Glennon*

 

Chicagoans and bond investors are now demanding to hear solutions that are adequate, quantified, verifiable, long term and politically viable. Mayor Emanuel held a press conference today specifically addressing Chicago Public Schools, but he offered none of those elements, nor even an indication that they are considered important. Sentiment, therefore, will erode further. And the mysterious loan from the Chicago teachers’ pension to CPS was ignored, adding to its mystery.

 

Here’s what Rahm said:

 

– It’s morally disgraceful that students are being victimized.

 

– It’s all Springfield’s fault, due to years of a patchwork scheme that forces Chicago to double pay on teacher pensions (Chicagoans pay for both the CPS pension and the statewide Teachers Retirement System). Springfield doesn’t care about Chicago kids. “I want Springfield to get off their duffs . . . and remedy the decades of inequity that have brought us to this place,” he said.

 

– Two options are available. Option A is to combine the CPS  pension with TRS. Option B is for the state to pick up the annual “normal costs” of pensions (newly incurred pension costs as opposed to the unfunded liabilities, which are already earned);  Option B would also require teachers to pay the 7 percent of salary for pensions that CPS now pays for them. Finally, Option B would mean “$175 million to $200 million” of new property taxes.

 

– Specific spending cuts were discussed, which are detailed in other articles like Fran Spielman’s.

 

There’s nothing adequate, quantified, verifiable, long term and politically viable in any of that except that the victimization of students is indeed disgraceful, and that the cuts that were announced are meaningful and painful.

 

Specifically, Option A to combine the Chicago and state pensions means nothing. Would the state pension assume the liabilities of the Chicago pension and somehow release CPS from whatever obligation it has? Of course not. More importantly, not a shred of information was provided about how the merger would work or its numerical impact on Chicago. And, by the way, the state pension is in worse shape than CPS’s. Why merge them?

 

Regarding Option B, you will find more downstate Illinoisans who want to talk about secession from Chicago than you will find who want to chip in more to solve Chicago’s problems. Yes, Chicagoans pay for both the Chicago and statewide teacher pension, but that’s only part of the picture, which has been debated and written about for years. Expect that debate to be rekindled, but Rahm will lose because, net-net and all-in, Chicago is not being shortchanged by Springfield, which is why the current arrangement came to be. And will Chicago taxpayers pony up without a long term solution in place? Doubtful. Finally, there’s no explanation at all how these changes would solve what’s at least a $1.1 billion annual deficit at CPS — an entity that only takes in about $5.1 billion in revenue.

 

Worst of all, Rahm did not even mention one of the stranger developments in CPS’s situation. Earlier today, the Sun-Times reported this bombshell: After all the hand wringing about the $634 million payment by CPS to its pension made yesterday, the pension is set to loan $500 million of it back to CPS! It came up only when Rahm was questioned about it, and he acknowledged that it’s in the works. Only the Sun-Times has covered it. All kinds of questions should be asked about that loan that haven’t been: Why is it being done? Why wasn’t it made public earlier (it’s clearly been in planning for some time).  Why do the pension trustees need an indemnification in case they are sued over it if they authorize it?

 

That loan is just another thing that bond analysts and taxpayers will be perplexed about, and they should be. What’s apparent is that the city is now struggling for day-to-day means of paying its bills. The short term fixes being undertaken would make sense if genuine, longer term solutions were being pursued, but they are not. The city is struggling to build a bridge to nowhere.

 

There’s a real alternative available for CPS, which we discussed here: wholesale reconstitution, and there’s at least partial precedent for it. McCormick Place’s governing body was reconstituted in the 1980s after the city ran it into the ground, and the CTA was partially reconstituted when the RTA took over part of its authority. Wholesale reconstitution could include the one element essential for fixing all financial problems for Illinois and its municipalities: Reducing earned pension benefits. Either those benefits get reduced or our problems don’t get solved.

 

Rahm has the support of most of the business community because it has viewed him as somebody smart enough to see reality when it knocks, and politically accomplished enough to react rationally. But you now have to wonder if he learned a false lesson as Chief of Staff for President Clinton. In times like the late 1990s when the economy was soaring, bull shit is the currency of the realm. Rahm and Clinton got away with plenty of it. But when things crash only numbers talk — real numbers. The longer Rahm delays facing reality the worse this crisis will become and the more credibility he will lose.

 

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

 

 

 

 

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One thing I am hearing from citiizens is “Well, I guess the tax increase is for the public good-so I don’t mind paying it.” This is very flimsy logic and we ought to blog about it to show why.

Anonymous

There’s something poetic about the pension fund loaning CPS money. I’m all for it. Now the pension has a reason to help CPS solve it’s fiscal problems rather than just draining all the funds away and assuming tax hikes will solve everything.

Mike

Regarding local Illinois public sector pensions such as the Chicago Teacher Pension Fund (CTPF), can you walk me through, how stop paying into the existing contract, and creating a new contract, is not diminishing or impairing the existing contract?

Are we talking about benefits accrued to date?

Or future benefits not yet earned?

Red Raspberry

When there is no contract that s the time to make changes. Reducing benefits is common when the negotiations are going on and the payer of the benefits is having financial troubles.

mark glennon
Mike- Fair question and, yes, I am talking about earned benefits, too. This is just for municipal pensions, not the five state pensions: It’s absolutely clear that a pension cannot reduce benefits under the recent Sup. Ct. case (which I agreed with). But it’s also clear there is no obligation for the municipality to contribute regularly into them, which is why the state has let them underfund so long. So, you can let it them dry, which is precisely what we are gradually doing anyway, just slowly. The question, after they run dry, becomes whether the municipality is obligated directly to the pensioners to pay benefits on… Read more »
Paul
Mark, when you question the Integrity of Illinois Courts you do a disservice to us all. You say Federal Court is a “Real” Court and your implication is Illinois Courts are not real. Of course an Illinois Court would reverse your illustrated attempt to intentially defund pensions(impairment unconstitutional) by simply not contributing to the pension funds. For this simple application of Law you insult the integrity of our Illinois Courts. Sad Mark. Very Sad. Meanwhile your EXPECTATION that a Federal Bankruptcy Court would allow your Illustrated manuever is also legally naive. For this plain reason: when pensions are singled out in isolation as the sole fiscal municipal… Read more »
mark glennon

Well, I’m glad you understood one part — that I was insulting the integrity of Illinois state courts.

As for the rest of it, probably best to read some of the earlier material posted here about Chapter 9. All unsecured debt gets cut equally along with unfunded pension debt in a bankruptcy, at least in theory. In practice, however, courts can be expected to favor pension debt, as they did in Detroit, where unsecured bondholders were cut far more than the unfunded portion pension debt.

Paul

Can you give an example, any example, where the Illinois Court system deserves your charge of lacking integrity on the whole? A Judge here or there maybe…but system wide? Surely you jest!
And is there any other State fiscal obligation/contract other than pensions, that is a target for breaking or avoiding or defaulting? Are pensions the ONLY promise the State should break?

Mike
Illinois Courts have had corrupt judges convicted in the past. Operation Greylord & Operation GAMBAT in Cook County Circuit courts. Two Illinois Supreme Court justices resigned while being investigated, Roy J. Solfisburg, Jr. and Ray Klingbiel. Otto Kerner the former Illinois Governor was convicted while a US Federal Judge in Chicago. There are more; maybe we have more “isolated” cases now, who knows. But legal actions have caused taxpayers and the State enough harm, even if nothing illegally was done. Look at all the legislative pension benefit hikes passed since the pension sentence was added to the Illinois State constitution in 1970, to the 19 pension funds… Read more »
Paul
Mark said the Illinois Courts lacked integrity and through implication were not “real” courts. He makes the charge without citing examples to back up his charge. Pure mudslinging. I expect Mark to show integrity by backing up his charge. Mike absolutly greylord, albeit 50 years ago, exposed some criminal court judges as being corrupt. But the whole court system? No.And Otto Kerner was a federal judge, and Mark calls the federal judges “real” judges.But I get the point that a few Judges can be bad. Your arguements about pension sweetners goes to the legeslature annd not the courts. I am anxiously awaiting Mark to back up his… Read more »
Bruce

Gulp. It’s not looking good…

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