Chicago Public Schools' Pension Crunch

A blog about business and economics.
Sept. 20 2012 12:06 PM

Chicago Public Schools' Pension Crunch

I get annoyed when conservatives talking about the federal government running out of money, but listening to some progressive crowing about the outcome of the Chicago teachers strike it's also frustrating when people don't acknowledge that the city of Chicago most certainly can run out of money. Things like extra money for music and art teachers could be great ideas or could be bad ones depending on where it comes from. But it's not as if Chicago Public Schools is sitting on some giant pile of money that administrations have just been refusing to use. On the contrary, it's actually sitting on a large unfunded pension obligation:

Having skipped its pension contributions for many years, Chicago is supposed to start tripling them in another year under state law. But the school district has drained its reserves. And it cannot easily turn to the local taxpayers because of a cap on property taxes. Borrowing the money would be difficult and expensive as well, because of a credit downgrade this summer. One of the few remaining choices would be to make deep cuts in other services.
Like Chicago, many cities and school districts now face pension pressure after reducing their contributions in recent years to save money. Among the funds for different types of workers, teachers’ plans tend to be shortchanged more often, according to research done by the Center for Retirement Research at Boston College for the New York Times.
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One possible alternative to "deep cuts in other services" would be to roll back some of the Tax Increment Financing (TIF) giveaways that reduce Chicago's tax haul. That's something the city can do that doesn't violate the state cap on property tax rates. Of course, TIF rollbacks might have some other downsides. But that aside, the problem is that TIF rollbacks have been put on the table by the Chicago Teachers Union as their main idea about how to pay for the new spending that will be required by the new contract. So while that parcel of new spending won't lead to cuts in other services, it may foreclose the alternative to cutting services as a way of meeting Chicago's pension obligations.

No doubt there are some more twists and turns to this. But the general point is that state and (especially) municipal governments really do operate on semi-fixed budget constraints. Even when new spending on a given program doesn't directly crowd out spending on other programs, it does crowd out taxing capacity which ends up crowding out programmatic spending. Now maybe the Chicago budget is in fact full of spending on things that are much less valuable than extra music teachers—municipal government contains a multitude of sins—but that's really the case you have to make to make the case for new spending.

Matthew Yglesias is the executive editor of Vox and author of The Rent Is Too Damn High.

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