The Urban Agenda

Pensions, Debt, and Government Services

Michael A. Pagano

• Publisher: University of Illinois Press
• Year: 2019
• ISBN:
  9780252051777
• Topic: Politics & International Relations
• Subtopic: Politics
• Index: Politics & International Relations

American cities continue to experience profound fiscal crises. Falling revenues cannot keep pace with the increased costs of vital public services, infrastructure development and improvement, and adequately funded pensions. Chicago presents an especially vivid example of these issues, as the state of Illinois's rocky fiscal condition compounds the city's daunting budget challenges. In The People's Money, Michael A. Pagano curates a group of essays that emerged from discussions at the 2018 UIC Urban Forum. The contributors explore fundamental questions related to measuring the fiscal health of cities, including how cities can raise revenue, the accountability of today's officials for the future financial position of a city, the legal and practical obstacles to pension reform and a balanced budget, and whether political collaboration offers an alternative to the competition that often undermines regional governance.Contributors: Jered B. Carr, Rebecca Hendrick, Martin J. Luby, David Merriman, Michael A. Pagano, David Saustad, Casey Sebetto, Michael D. Siciliano, James E. Spiotto, Gary Strong, Shu Wang, and Yonghong Wu

PART ONE

OVERVIEW

Introduction

CASEY SEBETTO

Shortly after the September 2018 Urban Forum, the federal government’s fiscal year (FY) ended and revealed a notable increase in the US deficit. At the federal level, decreasing revenues caused a 17 percent increase in the budget deficit between fiscal years 2017 and 2018, totaling $779 billion.1 This huge deficit at the federal level places increasing pressures on state, county, and municipal governments to provide infrastructure and public service funding. Across the United States, governments are grappling with decreasing revenues coupled with increasing costs for public services, infrastructure maintenance and development, and pension funding.

The unfunded pension obligations of state and local governments are growing in the United States. Moody’s Investors Service reported that fiscal year 2017 saw an increase in net pension liabilities for all fifty states. Total unfunded liabilities reached $1.6 trillion—147.4 percent of state revenue. This was up from $1.3 trillion—122 percent of state revenue—in fiscal year 2016.2

A conversation on the people’s money, with focuses on pensions, debt, and government services, was well set in Chicago, where the city, county, and state are all facing severe financial issues. The state of Illinois holds both the nation’s largest unfunded pension liability as a percentage of state revenue—600.9 percent of approximately $250 billion3—and the lowest state credit rating. As of 2017, Cook County had around $69 billion in unfunded pension liability,4 while currently Chicago has approximately $28 billion.5 The 2018 Urban Forum gathered local and national scholars, experts, government workers, and policy makers to analyze and discuss the difficult financial climate, how we got there, and what the future may hold.

The Urban Forum program director and dean of UIC’s College of Urban Planning and Public Affairs, Michael Pagano, greeted the room and set the stage for the day. He spoke of a collective passion to improve our cities, advance our children’s education, and improve the movement of people and goods, and he noted that to achieve these goals as a society, we need to come to some agreement on how these desires, needs, rights, and aspirations are paid for. General taxes and fees contributed to by all through a variety of forms provide a resource base for public services to be delivered, while the public officials elected can set limits on how much of these services are received. In addition to these taxes and fees, another trend has emerged in paying for government services—borrowing with bonds and debt. In the morning’s keynote address, Toni Preckwinkle, president of the Cook County Board of Commissioners, revealed several emergent themes that would resurface throughout the afternoon, including transparency, efficiency, and reform.

WHO GETS WHAT AND WHY? CITIES AND THE PEOPLE’S MONEY

In the 2019 fiscal year, Chicago will have the smallest budget deficit since 2007. Still, the city’s deficit is projected to be $97.9 million.6 Alternatively, New York City’s 2019 fiscal budget, agreed upon in June, is not only balanced but will add $125 million to the city’s general reserve fund, raising that fund to more than $1 billion.7 To discuss what fiscal management lessons can be shared between these two cities, the budget directors of New York City and Chicago, Melanie Hartzog (New York City Mayor’s Office of Budget Management) and Samantha Fields (City of Chicago), sat down to offer a view from inside.

BUDGETS ARE ABOUT TOUGH CHOICES. WHEN DRAWING UP A BUDGET EACH YEAR, WHAT ARE THE PRESSURES AND CONSIDERATIONS TO FUND A VARIETY OF SERVICES FROM CONSTITUENTS, COUNCIL MEMBERS, AND OTHER STAKEHOLDERS? New York City and Chicago have very different budgets, in both size and scope. For fiscal year 2019, New York City’s budget was approximately $90 billion; Chicago’s proposed budget for 2019 for all local funds is $8.86 billion.8 One factor of their vast difference is that Chicago has separate budgets for many of its government agencies, such as the Chicago Housing Authority, Chicago Transit Authority, Chicago Public Schools, and the Chicago Park District. Similar agencies in New York City, apart from the Metropolitan Transportation Authority, are combined within one budget, as the city is a unified government.

Melanie Hartzog explained that the New York City budget is guided by a set of priorities: maintaining a key level of reserves, examining revenue estimates to ensure their anticipation isn’t overestimated, and debt service. These priorities are guided by Mayor Bill de Blasio’s goals of being a progressive government that is both fiscally prudent and aggressive. New York City’s fifty-one council members have been supportive of these efforts, aiding in their implementation. The main drivers of the budget are labor, debt service, and education. Including labor as one of the main drivers was strategic. Hartzog explained that “when the mayor came into office, all of the collective bargaining contracts had been expired for some time. … It was a priority to settle those. From a financial management perspective, it gives continuity, knowing what those costs will be. Within those settlements include significant health care savings to offset the costs of labor settlements and retroactive payments.”

Labor costs are also a main driver of Chicago’s budget. Chicago has roughly thirty-five thousand employees, around 90 percent of whom are unionized. These labor-related obligations and increases are built into the budget each year, continuously constraining funding. Also like New York City, an additional driver of the budget is debt-service payments. A third driver of Chicago’s budget is pension obligations. While two of the three drivers mentioned by Fields include financial obligations, and although Mayor Rahm Emmanuel has worked to narrow Chicago’s budget gap, the shortcomings persist. Chicago could note New York’s prudence, and also learn from Cook County, which includes Chicago. During her keynote address, Toni Preckwinkle stated, “I believe that the most important obligation of government is to craft and pass a budget.” When she entered office in 2010, there was a budget gap of $487 million. Since then her administration has closed $2.1 billion in budget gaps and cut expenditures by more than $850 million. “Ensuring that the budget is balanced each year involves a great deal of pulling, tugging, and collaboration with not just commissioners who ultimately must pass the budget, but also with the independently elected officials who run county offices.”

WHERE MONEY GOES IS ONE FACET OF A BUDGET, BUT WHERE THE MONEY IS COMING FROM IS ANOTHER. New York City and Chicago have very different revenue sources for their annual operating budgets. New York relies heavily on property taxes, sales tax, and income tax. In Chicago much of the property tax goes toward liabilities, as opposed to the general operating fund, leaving the city with a much greater dependence on other taxes and fees. Specifically, Chicago’s property taxes are split three ways: debt-service payments, pension obligations, and a levy for the Chicago Public Library system.

Fields explained that the city aims to design revenue streams that are fairly diverse so that there is no reliance on just one source or industry. Diverse revenue sources ensure that services are maintained and impacts minimal when unforeseeable disruptions to those sources arise, such as changes in state funding. A recent tax introduced in Chicago is the ground transportation tax. By putting a regulation structure in place for the fairly new ride-sharing industry, the city was able to integrate a corresponding taxing structure. The city is being cautious in projecting those revenues, as it is a newer industry, there is limited data, and they don’t know when it will plateau. Still, the ride-sharing industry is becoming one of the city’s larger taxpayers; the 2018 budget overview estimates that the ground transportation tax will exceed its initial projections by $41 million.9

In New York City, property taxes constitute a considerable portion, and the highest percentage, of incoming revenues, at 29 percent.10 Personal income taxes make up the next highest amount of taxes coming in, but in terms of total incoming revenue, behind property taxes is state and federal funding—with the state contributing more than the federal government. Hartzog explained that this is largely driven by state education aid and that this large revenue stream was severely impacted this past year when the state budget presented $700 million in cuts and cost shifts, $500 million of which came to New York City. However, an unanticipated growth in personal income tax was able to offset the state budget cuts.

During the past year, personal income tax dollars in New York City were around $1.3 billion above the adopted budget forecast and $2.3 billion above the previous fiscal year. Hartzog stated that this unanticipated significant growth was largely a onetime occurrence and due to three factors—higher than anticipated Wall Street bonuses, the Trump tax bill, and the repatriation of funds (oversees funds coming back into the city and state)—and that it was the last year hedge-fund managers could repatriate funds from an Obama-era tax change. While both New York City and Chicago experienced recent unanticipated tax growth, both were cautious in their assessment of what that means for the future and stressed the importance of conservative revenue estimating so as not to overproject their income.

HOW DO YOU MANAGE THE RESPONSIBILITIES OF THE LONG-TERM LIABILITIES THAT CITIES FACE? New York City recently announced its collective bargaining settlements, which included significant health care savings. In the last round, the city achieved approximately $1.3 billion in annual health care savings and anticipate $1.9 billion in savings in the next round. Not only does that bend the curve for existing health care costs, but it also achieves savings for long-term liabilities. Additionally, Hartzog’s office has an agreement with the Municipal Labor Committee, composed of all city unions, to look at long-term structural health care cost savings. Similar to the city’s general reserve fund achievement, a partnership with the city council has aided in creating a Retiree Health Trust Fund that is currently funded at $3.5 billion and continuing to grow each year.

Chicago is currently in the process of negotiating all of its collective bargaining agreements, and part of the mandate given by Mayor Emmanuel is to ensure that they have some health care savings that will translate into savings for the city in the long run. One form these savings will take is in increased health care contributions on behalf of the employee. Additionally, the city does not provide all retirees with health care. Instead, the city offers a “bridge to opportunity” for retirees to take advantage of certain pricing to carry them from their retirement into the Medicaid/Medicare age groups. The mayor also implemented a corporate-inspired program that incentivizes employees to have periodic health check-ins and attend workshops or programs. The city is anticipating that by ensuring its workforce has regular visits with their doctors, emergency medical costs will be decreased, thereby saving money over time.

Long-term liabilities include future operating and capital costs and pension payments and liabilities. Additionally, for many governments, including Chi-cago and New York City, long-term liabilities include debt-service payments. Fields explained that in Chicago, a lot of the debt is general obligation (GO) debt that is backed by property tax and has a reduced credit rating because the debt limits have been reached. To provide more stability and certainty in the city’s debt-service planning, it was able to change their variable debt rate to a fixed rate. To do this, the city’s chief financial officer went to the mayor and the state to receive authority to approve the creation of a Sales Tax Securitization Corporation. This securitized a portion of the sales tax revenue so that some of the GO debt could be refinanced at a much lower rate, helping with debt-service payments. New York City also initiated the Citywide Savings Program, a collaborative effort that reexamines internal processes and policies while promoting efficiency, and over the course of two fiscal years, the city achieved around $2 billion in savings.11

Toni Preckwinkle also spoke of working to put Cook County on more sound financial footing by being more “judicious and careful about how we incur and pay down debt.” Since 2011 her administration has paid down the county’s debt by $450 million—12 percent. They have also limited any rise in debt service to 2 percent. Those efforts have allowed Cook County to borrow at much lower costs than other large local governments in the state.

Funding and debt associated with pensions is an additional long-term liability governments are facing, specifically when there is not enough funding in the budget to cover their liabilities. New York City and Chicago are both facing unfunded pension liabilities. New York has a mandate to fully fund its $50 billion unfunded liability by 2034. In Illinois a large part of the budget is dedicated to pensions; the state’s pension obligations and funding represent over 25 percent of the state budget. Being judicious and implementing best management practices for these liabilities, similar to the actions implemented regarding debt service and collective bargaining, will be crucial moving forward.

SINS OF OUR “FATHERS”: INHERITING PENSION BURDENS

Illinois currently holds both the largest state pension deficit and the lowest state credit rating. The state has $130 billion in unfunded pension liability,12 Cook County had around $69 billion as of 2017,13 and currently Chicago has approximately $28 billion.14 Taxpayers today and in the future are on the hook for this high pension burden. Who will bear the responsibility of paying this future liability, and what prompt solutions can be applied today? Chris Morrill, executive director and chief executive officer of the Government Finance Officers Association (GFOA), and Laurence Msall, president of the Civic Federation, joined the event to help discuss these questions.

ALTHOUGH THE SITUATION IN ILLINOIS IS SIGNIFICANT, THE STATE IS NOT ALONE IN FACING PROBLEMS OF UNFUNDED PENSION LIABILITIES. TO FIND A SOLUTION, YOU FIRST NEED TO UNDERSTAND YOUR PROBLEMS. HOW DID SO MANY US GOV-ERNMENTS FIND THEMSELVES IN THIS SITUATION? Many jurisdictions, states, and localities have been faced with pension crises. Chris Morrill explained the recent timeline of national events, beginning in 2001, when the aggregate funded ratio of government pensions was 103 percent. Because of this surplus, many governments used additional funds to improve various benefits. This continued until shortly before the Great Recession hit, when the aggregate funded rate was around 87 percent. Following the Great Recession, governments were generally hit in two considerable ways: a decline in revenues and corresponding decl...

Table of contents

• Cover
• Title
• Copyright
• Contents
• Preface and Acknowledgments
• Part One: Overview
• Part Two: White Papers
• List of Contributors
• Back Cover