Thursday, September 20, 2012

$295 million or $2 billion ... Which is More? ... Chicago's Broke ... A Huge Cause is Public Sector Pensions ... Now What?

The Chicago teachers strike is over. Soon the presidential election will be over as well.

Now let's pretend we're all Chicagoans for the rest of this posting.

When the elections have ended, then perhaps our Chicago politicians will finally come clean with us, or as clean as they know how, regarding the truly enormous financial problems facing our schools, city, state and nation as a whole.

The place to start is with pensions and other unfunded entitlements. You see, there's a huge void when it comes to matching promises with the ability to keep those promises.

As an example, the teachers contract calls for $295 million in salary increases over the next four years. Meanwhile, beginning in fiscal year 2014, the pension contributions will INCREASE by approximately $2 billion over the next four years.

Here's a math question: Which is greater, $295 million or $2 billion? And if the answer is $2 billion, why aren't we hearing much about it and why aren't our "leaders" talking to We the People about it?

We have several ways to address the pension funding shortfall, none of which is good or painless.

If we pay the beneifts, we can choose not to provide the same other public services we've been providing. Or we could choose to dramatically increase taxes. Or I suppose we could see if anybody would be foolish enough to loan us all the money we'll need to satisfy those unfunded promises, city services or other so-called necessities.

So, seriously now, just how bad are the finances of Chicago due to pension underfunding?  Read on.

Teachers' Tentative Deal Compounds Financial Woes has an interesting chart which summarizes the near term Chicago situation nicely:

"CHICAGO—The tentative teachers contract that ended a seven-day strike resolved some of this city's battles over how to run its schools. But it only added to worsening woes over how to pay for them.

Years of failing to adequately fund the teachers pension plan has left the district $6 billion in arrears. A construction program has contributed to a $1.1 billion increase in debt over the past five years. And the new contract requires $295 million to cover salary increases. As a result, the district faces deficits of $1 billion in each of the next several years—with little room to raise property taxes to pay for them.

These issues were not at the forefront of the discussion during the strike, but they all loom over the district's ability to educate its 400,000 students in the years to come. The stress on the system—and between the union and administration— is likely to rise as administrators consider extensive layoffs and school closings to bridge the financial gap.

"The Chicago Public School administration faces a dire financial situation with enormous challenges that will require not only cost cutting and reductions but begs for pension reform," said Laurence Msall, president of the Civic Federation, a Chicago government-watchdog organization.

CPS spokeswoman Becky Carroll said the district knows it has coming challenges and "we can't pretend to have all the answers right now." Planning for the 2014 budget is under way and "everything is on the table," she said. "There is no plan right now to close any schools, despite rumors that many continue to perpetuate."

The problems date to 1995, when Mayor Richard Daley, eager to avoid another strike, like the one that emptied schools for 19 days in 1987, took over control of the school district. To give him wiggle room, the state legislature passed a law allowing the city to pay just part of its pension obligation. Chicago took that windfall and increased teacher salaries, which in turn increased pension obligations. From 2002 to 2011, the district's yearly expenses increased by 41%, while total enrollment fell by about 8%.
Over nearly that same period, the pension fund went from being nearly fully funded to 60% funded, according to the Chicago Teachers' Pension Fund.

Under state law, the district must balance its budget. For the past several years, it did so by cutting positions, diverting students to nonunion charter schools and relying on one-time fixes including federal stimulus money.

But those options are disappearing. At the same time, the city's required annual pension payment will rise next year to $648 million from $196 million this year, according to Mr. Msall.
The jump in pension payments, along with the four years of salary increases from the teachers' contract, will contribute to the district's projected $1 billion shortfall in each of the next several years. The school district is its own taxing authority and under state law can only raise its tax every year as high as the Consumer Price Index.
The city will have to consider draconian actions, says Terry Mazany, a former schools chief in the city. He estimates 1,000 to 2,000 teacher layoffs (out of 26,000 teachers) and 100 school closings over the next few years.

"To balance the books is going to require extreme measures and a Hail Mary from the state legislature to augment funding," Mr. Mazany said.
The union didn't respond to requests for comment. On its website, it said the pensions are underfunded because the district "has dodged payment." The union said teachers don't pay into or receive Social Security and that one-fifth of 87,000 retired teachers receive pensions below $20,000 a year.

The district will be hard pressed to borrow its way out of the hole, and reserves are nearly wiped out. Credit rating agencies have downgraded the district or dimmed their outlook."

Summing Up

When the elections have ended, the problems will be there squarely on the table and staring us all in the face. And not only in Chicago and the state of Illinois.

This indebtedness and ongoing fiscal deficits are due to a lack of responsible actions by our elected officials throughout America over a long period of time. And by the failure of We the People to insist that anything constructive be done about it.

The day of reckoning is nigh. As the above chart indicates, for Chicago alone, it's roughly an annual average $500 million adder beginning in fiscal year 2014 just for teachers pensions alone.

There will be much more to come, of course, but it probably won't hit the front page of the local newspaper or be the lead story on the evening TV news until after the first Tuesday in November. 

How sad and how bad it that? But how true, too.

Thanks. Bob.

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