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Weed, gambling, COLAs, and more gambling

December 12, 2018

Chicago Mayor Rahm Emanuel today delivered a pension address to the Chicago City Council. At the outset, the mayor reasonably identified some of the sources of the city’s horrible financial condition, including longstanding failures to fund promises distributed to government workers.

“The truth is; going back decades too many elected officials, labor leaders, and civic leaders; people in positions of responsibility; agreed to a funding and benefits system that was not sustainable and therefore not responsible. Some knew it, and others should have known it. Simply put, leaders in the past made commitments without the resources to back them up. And now, inevitably, the bill has come due.”

So, how is the bill going to be paid?

With weed, gambling, COLAs, and more gambling.

Reporting on the pension address, a story in Crain’s was headlined “COLAs, cannabis, casino: It’s Emanuel’s pension Rx.”

Legalizing and taxing marijuana will produce some new revenue for the government, as will expanded gaming. How much, and how much might come at the expense of other existing 'sin tax' revenue sources, remains to be seen. The incremental revenue gains from taxing weed and gaming are certain, however, to fall far short of what is needed to balance the books.

The mayor did say that he would support amending the Illinois Constitution to allow for restructuring agreements with government worker labor unions, with his support specifically for reducing so-called “cost-of-living” increases for government pensions. Here, too, however, the reduced obligations would fall far short of filling the total gap between assets and liabilities in government pension funds.

So what can fill the void?

Granted, headlines have to be short, but the Crain’s headline ““COLAs, cannabis, casino: It’s Emanuel’s pension Rx” was a little too short. It excluded the most significant drug prescribed by the “Good Doctor“– a plan to issue bonds and put the proceeds into the pension funds.

This would undeniably strengthen the city pension funds. It also would undeniably shore up the expectations of city workers that they would be paid.

Would these benefits come from out of nowhere? Or from somebody else’s pockets, like taxpayers?

Effectively, pension obligation bond proposals like this strengthen pension funds at the expense of the entity assuming the risk, and higher leverage, associated with borrowing.

Emanuel asserted ”It is not more debt. It is the same amount of debt, but at a much lower and cheaper cost to taxpayers and the city.”

In a limited but mischievous sense, he is right. The city of Chicago owes money to the pension funds, and to the city’s bondholders. The city could borrow money on a bond offering and deliver the proceeds to the pension fund, replacing the money owed to the pension with more money owed to bondholders.

But in a world where employees and bondholders each share risks from possible government insolvencies, shoring up the employee positions can’t come from out of nowhere.

Weed, gambling, COLAs, and more gambling.

p.s. Crain's isn't alone. The Chicago Tribune's story on the mayor's pension address was headlined "Mayor Emanuel pushes public pension fix to City Council, including legalized marijuana, Chicago casino, constitutional amendment."

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