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We may never know why Rahm Emanuel decided to drop out of the Chicago mayoral race. But the media is certainly giving him a pass. They say he simply dropped out for fear of losing. But there’s a far more likely reason than that.
Emanuel is smart, and the smart reason for leaving is glaring: He doesn’t want to risk becoming “mayor bankruptcy.” Chicago is a ticking time bomb and Emanuel is jumping ship just in case it goes off.
Don’t dismiss that scenario too quickly. Despite his lofty intentions when he first took office, Emanuel has failed miserably to reform the city’s finances. Now the risk of insolvency is rising.
Chicago’s financials are dire and the city has no plan and no reserves to survive an inevitable recession. In fact, the city has barely kept its head above the water despite a decade of national economic growth. Chicago Public Schools was already at the brink of bankruptcy just one year ago.
Rahm knows the risks of collapse are rising. He’s passed property tax hikes, emptied the reserves and employed every budget trick he can to make the numbers “better.” He’s even sold off public assets – the city’s future sales tax revenues – to “shore up” the city’s finances, and yet Chicago is still junk rated by Moody’s.
CPS is in even deeper junk territory – far lower than even Detroit. And that’s after the state poured more money in as the result of a new funding formula.
Rahm has to know city finances will crumble when the nation’s economic rally ends. He only needs to look at how the city’s pension funds have done with the market’s winds at their back. The S&P was up more than three times from 2009 through 2017, and yet the city’s unfunded liabilities increased 2.75 times over the same period, largely the result of poor funding policies.
When the stock market rally started, the city’s unfunded liabilities, including those at CPS, were less than $17 billion. Today, they are at $38 billion. And those numbers are based on the official statistics – the rosy scenario. The pension shortfall is much larger – Moody’s pegs it at $67 billion – when more conservative investment return assumptions are used.
What will happen when the markets reverse? Three of the pension funds are now just one serious stock-market correction away from insolvency – if they’re not already there. The police and fire funds are officially less than 25 percent funded, while the municipal fund has just 28 percent of the funds it needs. The city’s best-funded plans – the Laborers and Teachers plans – are less than 50 funded.
The probability of a full meltdown when the next recession comes has increased. Reports on the city’s finances show that’s especially true when Chicago is compared to its peer cities.
The debt burden is overwhelming to both Chicagoans and the city itself.
According to Joshua Rauh of the Hoover Institution, the city of Chicago’s pension debts, using market-based assumptions, are now 12 times the size of its annual revenues.
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