Financial Crisis Looms Large for Chicago City Government

Chicago, the third-largest city in the United States, finds itself in a precarious financial situation, with a pension crisis that has been described as the worst among all American cities.

The recent signing of a bill by Illinois Governor J.B. Pritzker has created $11 billion in new liabilities for Chicago's police and fire pensions, pushing the "funded ratio" of these pensions to a worrying 18 percent. This move has put the city at risk of financial collapse.

The new pension benefits, which will cost $60 million next year and $753 million per year by 2055, are likely to lead to another credit downgrade for Chicago, potentially dropping the city into junk status. It's important to note that Chicago already has the worst credit rating among all U.S. cities.

The city spends around 40 percent of its budget on debt and pension costs, a significant burden that has led experts to propose measures to address the financial crisis. These measures include restructuring city debt, implementing fiscal reforms to increase revenue and cut costs, enhancing public safety to attract investment, and possibly seeking federal assistance rather than relying on military deployment, which has been controversial and met with local resistance.

In a letter to Congress, the Illinois Senate President requested $10 billion for a pension bailout in 2020. However, the Illinois constitution's "pension protection" clause makes it impossible to change pension benefits, even if voters want it. This clause has been a hurdle in addressing the pension crisis, but bankruptcy courts in Stockton, California, and Detroit, Michigan, have confirmed that federal Bankruptcy Code would take precedence over this clause.

Austin Berg, the executive director of the Chicago Policy Center and coauthor of "The New Chicago Way: Lessons from Other Big Cities," believes that Illinois should appoint a receiver or emergency manager, create a "Tier 3" retirement plan for all new public employees, and pass a state constitutional amendment allowing for changes to future benefits.

Chicago's pension problem is not unique. Total state and local government pension debt in the U.S. stands at $1.59 trillion. Other major cities, such as California and Texas, allow municipalities to enter Chapter 9 bankruptcy, a provision that could potentially offer a solution for Chicago.

The pension sweeteners passed unanimously in the Illinois General Assembly and received no public opposition from Chicago's Mayor Brandon Johnson. However, the long-term implications of these decisions are becoming increasingly clear, and addressing the pension crisis will be a critical challenge for the city in the coming years.

Photograph by Scott Olson/Getty Images.