Really, really messed up. It is bankrupt.
As dire as Chicagoâ€™s finances are, those of Illinois are in even worse shape. The primary cause, once again, is pensions, which are underfunded to the tune of $83 billion. Retireesâ€™ future health care is underfunded an additional $43 billion. Thereâ€™s a lot of regular debt, tooâ€”about $44 billion of it. And Illinois, like Chicago, has run large deficits for some time. Despite raising the individual income tax 66 percent and the corporate tax 46 percent in 2011, the state is projected to end the current fiscal year with an accumulated deficit of $5.2 billion. While California has made headlines by issuing IOUs to companies to which it owes money, Illinois has taken an easier route: it just stopped paying its bills, at one point last year racking up 208,000 of them, totaling $4.5 billion. Some businesses have gone unpaid for nine months or even longer. Unsurprisingly, Illinois has the worst credit rating of any state. Unable to pay its bills, it is de facto bankrupt.
Itâ€™s dragging down Chicago with it.
What accounts for Chicagoâ€™s miserable performance in the 2000s? The fiscal mess is the easiest part to account for: it is the result of poor leadership and powerful interest groups that benefit from the status quo. Public-union clout is literally written into the state constitution, which prohibits the diminution of state employeesâ€™ retirement benefits. Tales of abuse abound, such as the recent story of two lobbyists for a local teachersâ€™ union who, though they had never held government jobs, obtained full government pensions by doing a single day of substitute teaching apiece.
If the state and city had honestly funded the obligations they were taking on, their generosity to their workers would be less of a problem. But they didnâ€™t. As City Journal senior editor Steven Malanga has written for RealClearMarkets, Illinois â€œessentially wanted to be a low-tax (or at least a moderate-tax) state with high services and rich employee pensions.â€ Thatâ€™s an obviously unsustainable policy formula. The state has also employed a series of gimmicks to cover up persistent deficitsâ€”for example, using borrowed money to shore up its pension system and even to pay for current operations. At the city level, Mayor Richard M. Daley papered over deficits with such tricks as a now-infamous parking-meter lease. The city sold the right to parking revenues for 75 years to get $1.1 billion up front. Just two years into the deal, all but $180 million had been spent.
The debt and obligations begin to explain why jobs are leaving Chicago. It isnâ€™t a matter, as in many cities, of high taxes driving away businesses and residents. Though Chicago has the nationâ€™s highest sales tax, Illinois isnâ€™t a high-tax state; it scores 28th in the Tax Foundationâ€™s ranking of the best state tax climates. But the sheer scale of the stateâ€™s debts means that last yearâ€™s income-tax hikes are probably just a taste of whatâ€™s to come. (Cutting costs is another option, but that may be tricky, since Illinois is surprisingly lean in some areas already; it has the lowest number of state government employees per capita of any state, for example.) The expectation of higher future taxes has cast a cloud over the stateâ€™s business climate and contributed to the bleak economic numbers.
It also has some messed up city politics.
Another reason for Chicagoâ€™s troubles is that its business climate is terrible, especially for small firms. When the state pushed through the recent tax increases, certain big businesses had the clout to negotiate better deals for themselves. For example, the financial exchanges threatened to leave town until the state legislature gave them a special tax break, with an extension of a tax break for Sears thrown in for good measure. And so the deck seems to be stacked against the little guys, who get stuck with the bill while the big boys are plied with favors and subsidies.
It also hurts small businesses that Chicago operates under a system called â€œaldermanic privilege.â€ Matters handled administratively in many cities require a special ordinance in Chicago, and ordinances affecting a specific council districtâ€”called a â€œwardâ€ in Chicagoâ€”canâ€™t be passed unless the city council member for that ward, its â€œalderman,â€ signs off. One downside of the system is that, as the Chicago Reader reported, over 95 percent of city council legislation is consumed by â€œward housekeepingâ€ tasks. More important is that it hands the 50 aldermen nearly dictatorial control over what happens in their wards, from zoning changes to sidewalk cafÃ© permits. This dumps political risk onto the shoulders of every would-be entrepreneur, who knows that he must stay on the aldermanâ€™s good side to be in business. Itâ€™s also a recipe for sleaze: 31 aldermen have been convicted of corruption since 1970.
It kills small businesses
Red tape is another problem for small businesses. Outrages are legion. Scooterâ€™s Frozen Custard was cited by the city for illegally providing outdoor chairs for customersâ€”after being told by the local alderman that it didnâ€™t need a permit. Logan Square Kitchen, a licensed and inspected shared-kitchen operation for upscale food entrepreneurs, has had to clear numerous regulatory hurdles: each of the companies using its kitchen space had to get and pay for a separate license and reinspection, for example, and after the city retroactively classified the kitchen as a banquet hall, its application for various other licenses was rejected until it provided parking spaces. An entrepreneur who wanted to open a childrenâ€™s playroom to serve families visiting Northwestern Memorial Hospital was told that he needed to get a Public Place of Amusement licenseâ€”which he couldnâ€™t get, it turned out, because the proposed playroom was too close to a hospital!
And these are exactly the kind of hip, high-end businesses that the city claims to want. Who else stands a chance if even they get caught in a regulatory quagmire? As Chicagoland Chamber of Commerce CEO Jerry Roper has noted, â€œunnecessary and burdensome regulationâ€ puts Chicago â€œat a competitive disadvantage with other cities.â€ Companies also fear Cook Countyâ€™s litigation environment, which the U.S. Chamber of Commerce has called the most unfair and unreasonable in the country. Itâ€™s not hard to figure out why Chief Executive ranked Illinois 48th on its list of best states in which to do business.
Rahm Emmanuel is making some progress
Some of those challenges defy easy solutions: no government can conjure up a calling-card industry, and it isnâ€™t obvious how Chicago could turn around the Midwest. Mayor Emanuel is hobbled by some of the deals of the pastâ€”the parking-meter lease, for example, and various union contracts that donâ€™t expire until 2017 and that Daley signed to guarantee labor peace during the cityâ€™s failed Olympic bid.
But thereâ€™s a lot that Emanuel and Chicago can do, starting with facing the fiscal mess head-on. Emanuel has vowed to balance the budget without gimmicks. He cut spending in his 2012 budget by 5.4 percent. He wants to save money by letting private companies bid to provide city services. Heâ€™s found some small savings by better coordination with Cook County. Major surgery remains to be done, however, including a tough renegotiation of union contracts, merging some functions with county government, and some significant restructuring of certain agencies, such as the fire department. By far the most important item for both the city and state is pension reform for existing workersâ€”a politically and legally challenging project, to say the least. To date, only limited reforms have passed: the state changed its retirement age, but only for new hires.
Next is to improve the business climate by reforming governance and rules. This includes curtailing aldermanic privilege, shrinking the overly large city council, and radically pruning regulations. Emanuel has already gotten some votes of confidence from the cityâ€™s business community, recently announcing business expansions with more than 8,000 jobs, though theyâ€™re mostly from big corporate players.