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The Lessons Chicago Can Take From Detroit's Bankruptcy

By Chuck Sudo in News on Jul 23, 2013 7:30PM

Mayor Rahm Emanuel took the double shots of 2,100 Chicago Public Schools layoffs and Moody’s downgrading the city’s credit rating last week to call for the Illinois Legislature to tackle pension reform. Emanuel blamed the state’s and the city’s growing underfunded pension crisis for the layoffs and Moody’s credit downgrade.

"Denial is not a long-term strategy,” the mayor said. Yet it’s been the ruling action for decades, whether funding public pensions or other issues facing former industrial meccas such as Chicago and Detroit, which filed for Chapter 9 bankruptcy protection last week. A Wednesday court hearing has been scheduled to determine whether Detroit city employees can block the bankruptcy process with a lawsuit. Detroit has $18 billion in long-term debt it’s trying to crawl out from under, $11 billion of that debt is unsecured, including city pension plans.

Chicago doesn’t have the fundamental problems Detroit has in funding pensions; the city’s tax base is stable and the population loss from 2000 through 2010 wasn’t as sharp, the day of reckoning is near. Without a deal on pension reform in Springfield, Chicago’s pension obligations would rise from $467 million in 2014 to $1.2 billion in 2015. If you’re complaining about a lack of basic services now, think about what could happen in two years if an agreement on pension reform can’t be reached.

Underfunded pensions are the strongest parallels Detroit and Chicago share, but there are others. Moody’s cited an unwillingness to raise taxes to shore up mounting budget deficits and a need for more accountability in how the city spends money as other reasons for downgrading the city’s credit rating.

Ah, yes, taxes. Luckily for Chicago the city’s tax base is stable, there’s less delinquency than in Detroit and, unlike the Motor City, isn’t based on a single industry. More companies are moving their corporate offices to Chicago (if not manufacturing plants), and the city has become a burgeoning tech hub, with groups like 1871 Chicago serving as major incubators in the startup industry.

But more forward thinking is needed. Therese McGuire, a professor of management and strategy at Northwestern University's Kellogg School of Business, told Tribune business reporter Phil Rosenthal the Moody’s credit downgrade can be used as a political scalpel by Emanuel. "For Chicago, (Mayor Rahm) Emanuel is probably happy that Moody's downgraded the debt because he's going to be able to get concessions from the unions and whoever to make things happen. The problem is his hands are tied by the state. That's where our real political problems are."

Property and sales tax revenues in Chicago are also steadily improving as the economy shows signs of life, and the debt level here is nowhere near the size and scope of Detroit.