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Chicago Thu Jul 28 2011

No Amount of Austerity: Fixing Chicago's Budget

Chicago's enormous structural budget deficit, which could reach $700 million next year, is due in part to the cratering of the economy, particularly the free fall of revenue from real estate-related taxes and fees. But it is also due to the symbiotic lack of political will by politicians and political appetite by voters (and interest groups) to make painful decisions to meet the problem. The problem, by the way, is obvious: the city (you and me, the people who live in the city, not the abstract City) made promises to our employees--particularly our public safety employees, cops and firefighters--that our revenue simply cannot meet, and will not be able to meet without tax increases as well as cuts and reforms.

According to the Civic Federation, the city has a $14.6 billion dollar pension liability that is unfunded. To meet this liability, the city can rededicate revenue committed elsewhere to pension funding, raise contributions from current employees and decrease future benefits or eliminate cost of living adjustments, raise taxes, particularly property taxes, or some combination thereof. Solely raising taxes, particularly property taxes, would be politically unpalatable as well as eventually regressive--renters are already beginning to feel a squeeze. If we want to meet our obligations, some reasonable and fair combination of reform of the pension system, rededication of existing revenue (i.e., cuts to services in one place to pay for liabilities), and increasing revenue is necessary.

Yet the focus by the city to date has been almost wholly on "reforming work rules," in other words altering public worker contracts. Such reforms may very well be necessary, but they alone will not put a significant dent in the structural deficit. Mayor Emanuel and his team know full well that even with history's most efficient city government and not a single unionized employee, we would not be able to meet our obligations. Chicago News Coop columnist James Warren astutely observed that this is the strategy is meant to make future potentially unpopular actions--i.e., revenue increases--more palatable. If the Mayor also stokes unwarranted hysteria about thieving public employees, so be it.

The City's budget rests on several revenue streams. In descending order of quantity, the most significant of these are sales taxes, utilities taxes, the "personal property replacement tax" (a convoluted tax that boils down to a corporate income tax), transportation and recreation taxes, and business taxes. Licenses and fees provide a significant chunk, as do--or rather, did--income from parking meters.

Between 2007 and 2010, these revenue streams declined immensely, the biggest being the transaction tax, which is mostly a real estate transaction tax, which declined by over 40%, or $120 million, in that time. To make up these shortfalls, Mayor Daley recklessly privatized city assets. These privatization schemes (and they were schemes) amounted to little more than major borrowing programs that take up-front payments to compensate for revenue shocks. In an interview with the Chicago Tribune, University of Chicago Professor Julie Roin characterized the supposedly bold privatization moves this way,

"Politicians are calling these deals privatizations, but what they really are is secured loans....Whether you collect the revenue and pay it out to creditors or just divert the income stream to begin with is just inconsequential in terms of the financial ramifications of the transactions."

Of course, this is what critics of these deals said at the time they were made. The depth of Mayor Daley's political cowardice is really quite shocking. The "CEO Mayor" so beloved of Businessweek reporters and international business bigshots was more Enron than Iacocca.

And let's not forget that the reality is that the biggest expense to the city in terms of personnel--those vilified city workers--comes in the public safety department, cops and firefighters. But cops and firefighters are popular. You don't win reelection by slashing the budget of Police and Fire. The Fire Department has not had a serious efficiency review since 1999, and one does not seem to be in the offing.

So what has the policy been instead? Go after the other city workers. It's easy to get everyone to hate them: repeat cliches about lines at the DMV and napping Streets and Sanitation workers to wring out concessions that ultimately do little to address the structural deficit problem. Turn residents against the city's middle class public employees so you can avoid raising taxes for as long as possible. (While you're at it, try to avoid mentioning the fact that this assault disproportionately effects black Chicagoans).

When faced with a crisis, it is only fair for people who can afford it to give a little bit up. There's no question that city workers should be willing to make some concessions, particularly those related to efficiency. But no amount of that will address the problem, nor is it the only solution. Knowing that and ignoring it is cynical. So while the Better Government Association pursues its earth-shattering crusade against individual cases of goofing off, the structural deficit the city faces shows no improvement.

For their part, city employee unions have pointed out what many city government observers have known for a while: that Mayor Daley exploded the middle-management bureaucracy not covered by union contracts, more easily politicized hires. The Chicago Federation of Labor released a report that found that privatization and contracting does not automatically save money, and that in many cases public employees could provide services cheaper. Critics of privatization point out that it displaces one locus of patronage--giving individual jobs to clouted people--with a more dangerous types, handing out huge sweetheart contracts to the connected, also known as "pinstripe patronage." The same study showed that middle management is redundant and wasteful:

In some City departments, there's one manager for every two frontline staff. In recent years, the number of City employees has been reduced. According to the City's own budget documents, the City workforce has been reduced by 5,880 positions since 2002, a 15 percent decrease. But the number of supervisors, mid-level managers, and political appointees has not been proportionately reduced with the rest of the City workforce. This has created an imbalance in many departments, where fewer workers are actually doing the work and an excessive number of supervisors and managers are overseeing the work, increasing the cost to the City and its taxpayers. We don't need to be firing any more of the people actually doing the work - we need to get rid of the excessive number of people watching them do it.

Maybe, just maybe, public employees are not tax devouring monsters who need to be "tamed"--maybe the reason city government is inefficient in places is because bureaucracies are jammed with middle managers who add a layer of unnecessary work, and make a lot of money not being spent on actually providing direct service. Maybe it would have been worthwhile to consider this before announcing that "a new sheriff was in town" to bring the outlaw public workers to heel.

It would be easier to stomach the ceaseless villainizing of these middle class Chicagoans if the administration was equally as robust in insisting that those who can afford to pay more in taxes did indeed pay more, that highly-paid politically appointed bureaucrats may be unnecessary, if they pursued actually unpopular but potentially necessary solutions, such as ending the property tax exemptions to those charitable and religious institutions that may not warrant them. Or streamlining the TIF program and making it transparent, eliminating unnecessary subsidies. (While current TIF money can't be rerouted to pay for pensions, going forward it could save hundreds of millions of dollars a year if we reformed the process and rededicated it to its original purpose of developing blighted areas.)

Here's something else our media savvy Mayor isn't saying to Chicagoans: if this deficit is to be resolved, tax are going to have to go up.

Yes, these pension liabilities can be reformed any number of ways. Accepting these reforms will be a hard pill to swallow for these men and women who dedicated their working lives to protecting and serving. And I cannot countenance asking them to swallow that pill when there is no suggestion of some sacrifice by the wealthiest and most powerful residents. Nor is it fair to treat retired cops and firefighters or other city workers like high-graders or parasites and then go after their retirement nest egg.

Particularly when the Inspector General is releasing reports saying that the Mayor's hand-picked committee of high-powered CEOs are ignoring conflicts of interest to advocate for ever-more subsidies from property taxes:

[World Business Chicago] is a City-funded economic development organization. As part of the TIF approval process, WBC routinely submits to the City letters in support of corporations applying for TIF funds. The City, in turn, relies on WBC's letters as evidence of community support for the proposed TIF projects. The IGO has determined that WBC lacks an effective conflicts of interest policy necessary to ensure the integrity of the organization's recommendations to the City. Additionally, the IGO further concludes that the City should not rely on WBC's letters as evidence of community support for TIF projects because:

  • WBC is dependent upon the City for the majority of its funding and is therefore not an independent organization

  • WBC engages in minimal analysis of the merits of the TIF proposals for which it advocates

  • WBC's corporate directors each owe a fiduciary duty to their own companies, creating an apparent conflict of interest in WBC's evaluation of TIF proposals

Given the persistent concerns regarding transparency in the City's TIF program, the IGO recommends that the Office of Budget and Management (OBM) require WBC to adopt a rigorous conflict of interest policy. This policy should require WBC to disclose potential conflicts when making recommendations for City action-including the approval of TIF funds in which its employees, volunteers, officers, or directors have a personal interest.

Fealty to the political orthodoxy that every tax favor is absolutely necessary to appease the biggest institutions is unconscionable. And the approach to political theater that requires bludgeoning working class Chicagoans before pursuing sacrifice from the better-off is dispiriting and cynical. What's worse, that cynicism does little to actually make necessary tax increases more palatable. Contrary to the "savvy" that says you need to beat up on public employees before you can raise taxes, relentless chanting of the mantra that budget shortfalls are the result of union contracts makes any tax increase seem like a giveaway to special interests. So long as Chicagoans keep hearing that the cause of our problems is greedy public sector workers, the less likely they are to accept any tax increase so long as any public sector exists. You cannot simply turn off antagonism to the public good like a spigot.

Governance is all about compromise. Public sector workers are not uniquely immune to sacrifice in times of crisis; but nor should we cheer on their cynical scapegoating. Particularly when even their complete and utter annihilation would still leave us with a major problem. That isn't "making tough choices" or straight talk, it is precisely the kind of weak-willed, narrative-driven politics that confuses bullying and pandering for toughness and leadership.

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