Chicago endangered by pension shortfall

CHICAGO -- It's not the vision of a world-class city Chicago Mayor Rahm Emanuel typically likes to portray.

More teachers losing their jobs, thousands fewer police and firefighters on duty, less frequent trash collection and miles of potholed roads going unrepaired -- all as property taxes soar.

But that's the scenario Emanuel and others have said could befall the nation's third-largest city if the state Legislature -- which passed a landmark measure last week to address Illinois' severe public pension shortfall -- doesn't deal with Chicago's own multibillion-dollar pension problem.

The economic capital of Illinois and the Midwest, Chicago holds the dubious distinction of having the worst-funded public pension system of any major U.S. city. It's a crisis that's putting in peril Chicago's reputation as "the city that works," and its vision of being a modern transportation hub in the midst of a high-tech boom.

"Chicago sticks out for all the wrong reasons," said Rachel Barkley, a municipal credit analyst at Morningstar Inc., referring to a public pension system that is only 35 percent funded, compared to New York's 60 percent and San Francisco's 88 percent.

It's raising the question: Which version of itself will Chicago become?

Just raising taxes, which could cause businesses to leave, or cutting services, which would penalize residents, won't be enough, said Michael Pagano, dean of the College of Urban Planning and Public Affairs at the University of Illinois at Chicago.

"I don't think either one is even a possibility," he said. "Everybody's going to have to give something."

Chicago's pension funds for city workers, police officers and firefighters are about $19.5 billion short of what's needed to meet its obligations.

The shortfall amounts to about $7,100 per resident. That's nearly eight times the per person cost of the unfunded pension liability in Detroit, a city that saw its population plummet in the years before it went into bankruptcy earlier this year. Add the unfunded liability for Chicago teacher pensions, and the total shortfall jumps to about $27 billion.

City officials say the shortfall is due largely to investment losses during recent economic downturns, to workers and retirees living longer and to increases in benefits. The city's annual contributions to the funds, set by state law, also were well below what was necessary for meeting its obligations, according to a Morningstar analysis.

Under state statute, those contributions are scheduled to more than double next year, to about $1.07 billion. Emanuel, a former White House chief of staff who is up for re-election in 2015, says the increase is about equal to the annual cost of having 4,300 police officers on the beat or resurfacing 16,000 city blocks.

If the city doesn't cut services and pension benefits aren't changed, he says, the annual payment would require a 150 percent hike in property taxes -- an increase he calls "unacceptable."

Chicago Public Schools' payment to the pension fund for Chicago teachers also is slated to increase next year, from $196 million last year to $600 million.

Emanuel wants the Legislature, which must approve any changes to pension benefits, to raise the retirement age and cut cost-of-living increases, as it did for the state pension system.

"The pension crisis is not truly solved until relief is brought to Chicago and all of the other local governments across our state that are standing on the brink of a fiscal cliff because of our pension liabilities," he said after lawmakers approved the state changes last week.

Senate President John Cullerton, a Chicago Democrat, said he wants to take up the issue "as soon as we can when we come back next year." Lawmakers are next scheduled to meet at the Capitol in Springfield in late January.

Jesse Sharkey, vice president of the Chicago Teachers Union, said the union fully expects a bill that will solve the problem "on the backs of working people."

He warned the Legislature should prepare for protests on the scale of those in Wisconsin in 2011, when thousands of union members camped out in the state Capitol to protest Republican Gov. Scott Walker's attempts to effectively end collective bargaining for most state workers.

"There's no way this attack isn't coming, and we're gearing up for it," Sharkey said.

Emanuel isn't backing down either.

He says reducing the city's and the Chicago Public Schools' payments to the pension funds is particularly critical for the school system, which closed dozens of schools this fall, in part because of budget problems.

"I don't want the cost as it relates to pensions to crowd out the future of the city of Chicago, which is our children," he told a group of executives during a recent Bloomberg Business Summit.

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Associated Press writer Kerry Lester in Springfield, Ill., contributed to this report.