This year every city and state in America is struggling with acute fiscal shortfalls. Illinois estimated a budget deficit of $6 billion and Chicago’s budget deficit is expected to be $2 billion.
Both governments were in deep debt before the crisis with Chicago needing $36 billion to pay the debt it already had and Illinois needing $226 billion. Both governments have gotten into their financial messes despite balanced budget requirements. For years they have been circumventing the intent of these requirements by using budgeting gimmicks. These include recording borrowed money as revenue, selling assets such as the parking meters and skyway, and excluding billions of dollars of expenses in the budget calculations.
The biggest gimmick has been deferred compensation schemes that kept current compensation costs lower by committing to pay unionized employees benefits when they retiree. If budgets were truly balanced then the annual state and city budgets should have included proper contributions into the pension and retiree health care system. But instead of contributing what the pension plans’ financial experts, known as actuaries, determined should be paid, the city and state made contributions determined by their own financial wizards, known as the Illinois general assembly. As a result, Illinois pension plans are underfunded by $144 billion and Chicago’s pensions are $32 billion short.
Obviously, Illinois and Chicago were in financial messes before but now they are in a real crisis. But the stories on how Governor JB Pritzker and Mayor Lori Lightfoot are planning to handle this crisis are very different.
With a projected $6 billion deficit the governor’s budget carried on Illinois poor financial planning as usual. Both state workers and legislators have received automatic pay raises. Instead of making the hard choices like most Illinoisians are having to do during this crisis, the state is planning to go to Uncle Sam for a hand out. While Congress is deadlocked on additional federal aid to the states, Springfield has included that money as revenue in its budget or it will borrow even more money for a special Federal Reserve lending facility. Only Illinois has taken advantage of this facility because its finances are so poor that it can’t get money from the usual lending source, the municipal bond market, without paying expensive interest rates.
Governor Pritzker and the general assembly are also counting on $1 billion from a progressive tax that voters haven’t even approved.
Mayor Lightfoot is taking a different approach. She is doing what most Illinois have had to do during this crisis. Proposing hard choices, such as cutting expenses and trying to figure out how to make more money.
The mayor is not counting on a DC bailout. She is putting everything on the table including layoffs, pay cuts, gas tax increases, and massive property tax increases.
Unfortunately Mayor Lightfoot is also resorting to a refinancing scheme to fill $501 million of the estimated $1.2 deficit. While it might be good to trade higher interest loans for lower interest ones and lengthening the time the loans will be repaid might “save” money now, but it will require taxpayers to pay interest on this debt for decades.
This is a time to tighten our belt and not continue to be in the fantasy land of balanced budgets by borrowing money, refinancing schemes and counting on money that hasn’t been approved.