The looming battle between Chicago and Illinois
The bankruptcy filing of Detroit has thrust the fiscal health of America’s cities into the spotlight. This is a good thing, because a number of U.S. cities are facing similar problems: Declining populations, rising costs, heavy pension burdens and thin budgets.
Chicago is in a unique situation where, burdened with enormous pension costs, it is unable to adjust current pension commitments. This is because the State of Illinois has control of the law that applies to Chicago’s pensions. This may sound odd, but it is how muniland works. In addition to state capitols passing revenue to local governments, they often have significant control over the disposition of local finances.
When local governments are facing fiscal distress and considering bankruptcies, it becomes clear how much they appear like adolescents compared to states. Oddly though, the debts of local governments are not state liabilities, unless the debts are specifically assumed by the state.
Pew Charitable Trusts released a report on the approaches of states to their fiscally-stressed municipalities. You can see which states have pro-active policies for intervention in this Pew Map:
Illinois has a law that allows it to intervene in the finances of Chicago, if necessary. This includes the fact that Chicago may not declare bankruptcy without approval from the state. Here is how it would work, according to the blog ChicagoNow:
In Illinois, the Local Government Financial Planning and Supervision Act sets out the details for local governments [for state oversight].
Under the law, local governments — municipalities, school districts and so forth — that declare a fiscal emergency would petition the governor to establish a special financial planning and supervision commission. Essentially, the local government would have to agree to enter into something like a receivership that would prescribe the necessary medicine.
And a bitter pill it would be: setting a balanced budget by, among other things, requiring tax increases and deep spending cuts. Its powers seem broad enough that it might even be able to force the liquidation of city assets. More certain is the commission’s power to halt any state payments that the local government, say Chicago, is entitled to receive. Ouch.
I’m not predicting that Chicago will go bankrupt, I’m just pointing out the political and legal ground that underlines the struggle between Chicago and Illinois for fiscal stability. As I’ve written previously, Chicago mayor Rahm Emanuel seems curiously detached from the pension battles happening in the state capitol. He is also adamant that he will not raise taxes:
Mayor Rahm Emanuel will not raise sales or property taxes to close a $338.7 million gap in next year’s budget, but all bets are off in 2015, when the shortfall balloons to $1 billion without pension reform, a top mayoral aide said Wednesday.
It seems as if the struggles in Illinois will exceed the struggles that we saw between Detroit and the state of Michigan. Michigan is in good fiscal condition, whereas Illinois is the lowest-rated state in the nation, with crushing pension liabilities of its own, a backlog of billions of unpaid bills and a large tax increase that is set to end in 2015. Detroit and Michigan are a mere preview of the struggles between Chicago and Illinois. Buckle up.
Bankruptcy map via Governing
State intervention map via Pew Charitable Trusts
Avoiding and Using Chapter 9 in Times of Fiscal Stress via Orrick