The financial nightmare that's been facing Chicago seems to be getting worse. Moody's Investor Services downgraded the city's credit rating on $8.3 billion in debt last week from A3 to Baa1, dropping it just three levels above junk-bond status. This comes just after a three-step downgrade for the city last July. Chicago's downgrade also means the third-largest U.S. municipality has the second-lowest credit score among major cities.
Pensions
By 2015, state legislation will require Chicago to increase contributions to its public safety pension plans, seeing increases from $467 million in 2014 to roughly $1.2 billion by 2015. What Chicago must not do is follow in the footsteps of neighboring Detroit. Just on the other side of Lake Michigan, Emergency Manager Kevyn Orr's proposed bankruptcy restructuring plan could significantly impact retirees with pension reductions and health care cuts. It's a slap in the face to the poor public workers who dedicated their entire lives to serving the city. How do you explain it to all the police officers and firemen who put their lives on the line every day and were relying on those pensions?
Government Bailout Not The Answer
The larger picture lurking in the shadows is whether or not Chicago is headed for a federal government bailout. This would have disastrous consequences, setting a precedent that could open the door to municipal bankruptcies around the country -- and that's just the beginning. A federal bailout sends a message that it's ok to mismanage your finances, because the federal government will come riding in as the hero on the white horse signing, "Here I come to save the day."
Last year, a poll from Quinnipiac University showed that a majority of Democrats believed the federal government should bail out Detroit, but thankfully an even larger majority of Americans opposed such a move. Of course that's not to say it won't ever happen. In 2013, the city of Detroit received $300 million from the federal government. This wasn't called a bailout, however, because none of the money was used to reduce the staggering debt that forced its July bankruptcy filing -- and most of the money came from existing national programs for which Detroit was already eligible.
The final hearing on Detroit's bankruptcy will come July 16, allowing additional time for creditors to reach deals with the city prior to what is expected to be a massive court battle. In Detroit, Chicago and anywhere else, a federal government bailout should be off the table.
Solutions
In most cases, the solution starts with eliminating wasteful spending with money that's not available, liquidating assets, dissolving the unions, and getting out of an entitlement way of thinking that a bailout is the solution. More specifically, there are what will be seen as more radical methods of eliminating the debt and raising capital:
- Legalize Marijuana: The Department of Revenue is expected to report this week how much money dispensaries in Colorado paid in sales taxes in January. The tax haul is expected to outpace projections of about $70 million this year. If Illinois followed suit and legalized marijuana, that would be an enormous source of income for the city of Chicago. Those dollars could be put towards reducing the debt, paying pensions, building schools and in so many important other ways. Marijuana prohibition now costs state and federal governments as much as $20 billion a year, an economist told The Huffington Post. And guess what? There's no evidence in Colorado that legalized marijuana has led to hard drug use or increased crime.
- Legalize Gambling: U.S. casinos earned $37.3 billion in gross gaming revenue in 2012, according to the American Gaming Association. The taxed income is money we could use to reduce the deficit, rebuild our aging infrastructure, and protect our borders. And in cities like Chicago and Detroit, imagine what that money could do. Instead, we simply inflate the currency by asking the Federal Reserve to print more money with no way to pay it back. How moral is it that with every billion-dollar bailout another generation of unborn Americans will be strangled with their grandparent's debt?
- Abolish The Unions: Unions aren't necessary anymore in America. Collective bargaining raises the costs of providing services. Congress shouldn't be making those decisions for the state. In North Las Vegas last month, for example, a district court judge ruled in January that the city did not have the authority to suspend collectively bargained union raises. This will force the city to pay out a settlement ranging from $25 million to $42 million, and that's on top of its already existing $18 million structural deficit the city is trying to solve.
Thirty to 40 years ago, employers abused their power and unions leveled the playing field. Today, the power is in the hands of the people, and the abuse of power is now coming from the unions. Just look at what happened in Chicago last year when unionized teachers went on strike because they became spoiled with inflated wages, tenure and guaranteed work based on every factor outside of job performance and results.
Chicago has other elevated debt levels, not even looking at its pension obligations. If there is a glimmer of hope for the city, it's that it is one of the nation's largest and most diverse economies. It also has a large property tax base with the legal authority to levy property taxes and sales taxes, which obviously won't be popular with anyone, especially when there are other options.
Chicago Mayor Rahm Emanuel said, "The resolution to this crisis must be a balanced approach." But actually, the answer lies in significantly increasing revenue. Some people will kick, scream and argue that it can't be done this way, but these same so-called "radical" tactics have been implemented around the country and have brought in millions of dollars to local economies and municipalities.