Chicago’s Finances A Mess For 2014 And Beyond

The beginning of the new year is always a popular time for predictions.

Here’s one I’ve heard being uttered with more regularity lately:

“Chicago’s the next Detroit”

You may recall that back on December 3, the City of Detroit officially became the largest municipality in U.S. history to enter Chapter 9 bankruptcy.

I’m guessing those making that comment presume the “Windy City” is going to be bankrupt too.

I just got done reading another comparison to Detroit being made again. This time it’s from TheStreet.com, the U.S. financial news and services website co-founded by Jim Cramer, host of CNBC’s Mad Money. Jonathan Yates wrote on December 30:

A recent report by the Economist Intelligence Unit rated Chicago one of the top 10 cities in the world for its ability to “attract capital, business, talent and tourists.”

Although that certainly will focus global attention on “The Second City,” Chicago’s precarious financial condition could result in it becoming even more well known — for going broke…

At least Detroit had an excuse with the collapse of the automobile industry.

The major reason for Chicago’s financial woes is mismanagement. The city’s employee costs, especially for pensions, are unsustainable…

Yates, a contributor to TheStreet.com, suggests investors avoid Chicago bonds. He pointed out later in his piece:

Chicago is a great city with great restaurants, great museums and great architecture.

But those are not reasons to buy its bonds, because Chicago’s finances are a mess, and that won’t change anytime soon…

“Chicago’s finances are a mess, and that won’t change anytime soon…”

Sadly, I agree with him there.

Now, Yates mentioned Chicago’s public pension crisis. Back on August 5, The New York Times highlighted just how serious a threat it is to the city’s well-being. Monica Davey and Mary Williams Walsh reported on the Times website:

Corporations are moving in, and housing prices are looking better across the region. There has been a slight uptick in population. But a crushing problem lurks beneath the signs of economic recovery in Chicago: one of the most poorly funded pension systems among the nation’s major cities. Its plight threatens to upend the finances of President Obama’s hometown, now run by his former chief of staff, Rahm Emanuel.

The pension fund for retired Chicago teachers stands at risk of collapse. The city’s four funds for other retired city workers are short by $19.5 billion. At least one of the funds is in peril of running out of money in less than a decade. And starting in 2015, the city will be required by the state to make far larger contributions to the funds, which could leave it hundreds of millions of dollars in the red — as much as it would cost to pay 4,300 police officers to patrol the streets for a year

(Editor’s note: Italics added for emphasis)

Rick Lyman of the Times added on December 4:

Under state law, the city must increase its contributions to its workers’ pension funds by $590 million in 2015, to a total annual contribution of $1.4 billion for current and future retirees. If no pension deal can be reached by November of next year, when the city will draft its next budget, the city will either have to raise taxes or cut services or some combination of both

(Editor’s note: Italics added for emphasis)

City Hall and their supporters can spin Chicago’s growing financial crisis as much as they want. But at the end of the day, they’ve got all the above problems to contend with as well as a long-term debt that’s now up to nearly $29 billion, or $10,780 for every city resident, according to the latest City of Chicago official audit.

I became aware of the extent of Chicago’s financial woes a couple of years back.

It’s a big reason why my girlfriend and I moved out of the city when we did.

I’ve been warning about this debacle for some time now on this blog. I can only hope my Chicago-based readers have taken note of it and are at least thinking about how they might minimize their exposure to the coming mess.

By Christopher E. Hill
Survival And Prosperity (www.survivalandprosperity.com)

Sources:

Yates, Jonathan. “Avoid Chicago’s Bonds; It Could Be the Next Detroit.” TheStreet.com. 30 Dec. 2013. (http://www.thestreet.com/story/12188473/1/avoid-chicagos-bonds-it-could-be-the-next-detroit.html). 3 Jan. 2014.

Davey, Monica and Walsh, Mary Williams. “Chicago Sees Pension Crisis Drawing Near.” The New York Times. 5 Aug. 2013. (http://www.nytimes.com/2013/08/06/us/chicago-sees-pension-crisis-drawing-near.html?pagewanted=1&_r=0&src=me). 3 Jan. 2014.

Lyman, Rick. “Chicago Pursues Deal to Change Pension Funding.” The New York Times. 4 Dec. 2013. (http://www.nytimes.com/2013/12/05/us/chicago-pursues-deal-to-change-pension-funding.html?_r=0). 3 Jan 2014.

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Sunday, January 5th, 2014 Bankruptcy, Bonds, Debt Crisis, Entitlements, Government

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Survival And Prosperity
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Christopher E. Hill, Editor

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