Windy City Debt Scenario: Blown Away Yet?

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Chicago, one of the great global metropolises, is in a world of hurt…. serious hurt; so badly mangled that if left uncorrected, the Windy City, as it is affectionately known, stands to get blown to smithereens, just like it’s fellow city to the north – Detroit.

The crux of the issue boils down to a simple phrase: fiscal irresponsibility. It’s a storm system that has been building in intensity for years. And for me, a former Chicago resident, it elicits a deep sadness for the city I truly love.

Chicagoans have a term of endearment for the frigid, sub-zero winds that come howling in off Lake Michigan during the heart of winter. They call it “The Hawk.” This term applies equally well to the cold, hard, chilling facts associated with the fiscal ‘winter’ that the city is facing. A $1 billion operating shortfall, combined with a pension crisis registering at $20 billion. On top of that, the Chicago Public School system has a cool $1 billion shortfall along with a $9.5 billion tab for unfunded pension liability.

The warnings regarding the impending financial doom have long been there. In essence, they date back to 2003, a time when Chicago’s municipal budget was adversely impacted by the Great Recession. Making a dire situation worse, former mayor Richard M. Daley engaged in a number of questionable deals that accelerated the city’s debt load. The greatest mess has been Chicago’s pension system which is heavily mired in unfunded liabilty. Closely tied to this are the chronically upside-down Chicago schools that are closing and laying off teachers at an alarming rate due to funding deficits. What makes the school issue such a joke is the position being taken by the Chicago Teachers Union; namely, let’s dig in our heels and oppose any and all fiscal reforms that might help mitigate the debt situation.

Reality has now started to hit home, beginning earlier this year when ratings agency Moody’s downgraded the city’s credit rating to junk status. Given Chicago’s massive fiscal load, mercurial Chicago Mayor Ron Emanuel will be six years into his tenure before the city’s borrowing spree ceases long enough just to make interest payments on the debt. And pensions aside, it will be eight years into his tenure before the city has any reasonable shot at a balanced budget.

If that doesn’t make you want to choke, then this will: Chicago’s Mayor wants the State of Illinois to pick up the tab for teacher pensions. Sounds like a good ‘forward lateral’ move, except for the fact that the state is also in a financial black hole, one so deep that many regard Illinois as the most fiscally irresponsible state in the nation.

Now for the Biggest Kicker Of All. It was just announced that a 10.25% sales tax is about to go in effect in Chicago and the rest of Cook County due to this mismanagement of billions of taxpayers’ dollars. Yes, you heard that right: A whopping 10.5%! That’s insane!

The operative question with all of this is, what should Chicago do to rectify this massive mess? I am of the opinion that discussions about cuts, efficiencies, cost savings and revenue enhancement are a lost cause because of Chicago’s history of political infighting and burdensome bureaucracy, an ugly morass deeper than the cheese on their infamous deep-dish pizza.

Not that anyone really cares about my solution. But just for kicks, here is what I would recommend:

Do Nothing and Let The City Go Belly Up…….

It’s an interesting spectacle to watch how stakeholders react when things hit rock-bottom; when headed down the toilet, they suddenly generate all sorts of creative solutions and inspired actions. How do I know? Because on a personal level, I once was there.

My own experience aside, a more realistic case study on letting the dominoes fall comes from another cold place in the world, a country called Iceland. As a casualty of the 2007-08 global financial crisis, Iceland took the hardest blow of any European country. What’s remarkable about this is that they made the most robust recovery.

How did this occur? In large part, it was the result of allowing their major banks to fail.

So let me ask you this. Doesn’t that sound like a cold yet attention-grabbing way to get Chicago’s city leaders to jump out of the lake and take action?

I definitely think it’s worth a shot.

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