Analyst: Chicago can take lead nationally in pension reform, even with a bankruptcy
Chicago's pension crisis seems insurmountable, but if the city can find a resolution, the rest of the country likely will follow that lead, a noted financial analyst said during a recent interview.
"Chicago is going to be ground zero for the rest of the nation for how it deals with its pension stress," Danielle DiMartino Booth, a former Federal Reserve of Dallas senior financial analyst and now president of Money Strong, said during a Chicago City Wire phone interview. "All eyes are on the Windy City right now."
DiMartino Booth said she is not a legal expert, but that it's clear lawmakers, including President-elect Donald Trump and the incoming U.S. Congress, as well as the judiciary, need to step up. "Something is going to have to give," she said. "If it comes down through the judiciary providing for bankruptcy relief, then so be it."
Things got exponentially worse for Chicago on Dec. 1, when Gov. Bruce Rauner vetoed a $215 million bill to bail out Chicago Public Schools' pension fund. Chicago Public Schools needed the money to close a massive hole in its pension fund. "Clearly, the State of Illinois is unable to provide a solution," DiMartino Booth said.
The state has public pension problems of its own. Illinois' public pension crisis is the worst in the nation, Bloomberg News said. By fiscal 2014, Illinois' pension shortfall was more than $100 billion, and partisan bickering in Springfield yielded no improvement. Illinois’ pension debt increased to $130 billion in 2016, up from $111 billion in 2015, according to an Illinois Policy Institute report, which cites the Commission on Government Forecasting and Accountability.
Last spring, former Illinois state Rep. Ron Sandack (R-Downers Grove), called for the state to declare bankruptcy, which the state currently cannot legally do.
However, Chicago and other state municipalities could go that route, using Detroit as a precedent. Pensioners in that city received 35 cents on the dollar, among other provisions in Detroit's bankruptcy filing. Michigan recently reported that Detroit has projected a $35 million surplus for the current budget year.
State lawmakers also haven't been getting much help from the Illinois Supreme Court. In May of 2015, Illinois' highest court unanimously ruled a state pension law unconstitutional It had been signed in 2013 by then-Gov. Pat Quinn to scale back government worker benefits. This past March, the high court unanimously struck down state legislators' attempts to rewrite some public employee pension funding rules.
Nationwide, underfunded government pensions amount to about $1.3 trillion, which really can't be paid, DiMartino Booth said in a recent Business Insider report. DiMartino Booth also has issued warnings in other articles, including "Commercial Real Estate: From Towers of Gold to Pillars of Salt," published this week, and "The Federal Reserve to Pensions: Suspend Disbelief Indefinitely," published Nov. 2.
DiMartino Booth said she sees no option other than bankruptcy for Chicago.
"I really don't," she said. "It seems to me that the teachers' union has such a hold on the situation that you would have to have something dramatic, like filing for bankruptcy protection, to break that.
The new president and Congress also could play a role by passing legislation that would make it easier for states and municipalities to file for bankruptcy protection, DiMartino Booth said.
"I don't know that they will do that," she said. "However, I would hope they would at least consider it."