CN July 9, 2015

 

There’s a provocative article in the latest In These Times that should be mandatory reading for everyone concerned about the pension/budget crisis that’s gripping Illinois.

It’s titled Why Chicago Won’t go Bankrupt, and Detroit Didn’t Have To. It’s written by Saqib Bhatti of the Roosevelt Institution, and he was our guest on today’s program.

Bhatti echoes the theme that has been heard often on Chicago Newsroom – that more than anything else, we have a revenue problem. That for decades municipal governments have been starved of tax increases that keep up with the rising cost of providing desirable services, and that, forced to decide between dropping services and going into debt, they have most often chosen borrowing, to the delight of the financial sector.

“The banks played a huge role in the bankruptcy in Detroit, Bhatti explains. ” What it speaks to is the issue that, you need to figure out a way to raise revenue and you’re unable to do it. So the banks come peddling you a deal, saying, hey – we see that you’re hard-up for cash. Here’s a deal you can do. Much the same way that they targeted cash-strapped homeowners. They sold them mortgages that theoretically were great deals but their hidden risk and hidden costs were really complex, and often designed to fail. And Detroit got basically the municipal version of those sub-prime mortgages.”

And the result was predictable.

“Down the line those deals backfired in a really big way,” he reports.”They ended up costing billions more than they should have. The interest-rate swaps in particular blew up fantastically. The City ended up … paying hundreds of millions in fees on the swaps.”

It’s widely accepted that Mayor Daley obligated the City to a large number of these questionable financial arrangements, and that he left a pile of them for Rahm Emanuel to deal with. Has the Mayor succeeded in cleaning up a significant portion of these obligations?

No, Bhatti asserts. “He’s done more kicking the can down the road. More of the short-term fixes. Gimmicks like red-light cameras and speeding cameras to balance the budget. He hasn’t done the difficult thing which needs to be done – figure out how to raise progressive revenue in this city…but he’s not willing to do that because progressive revenue means making rich people pay their fair share instead of pushing all the burden onto those who can least afford it.”

Beat addresses in his article a perverse cycle in which the wealthiest forces in our society profit from the general misery.

“Municipal bonds are tax exempt, which means they tend to pay lower interest rates,” he explains. And because that’s the case, major institutional investors tend not to invest in a big way in municipal bonds.”

“We’ve created this system in which they create a crisis and then they profit off of it,” he explains.  “The privatizer, the wealthy, the Wall Street banks, they’re the ones who are not paying their fair share in taxes…they’re lobbying to keep taxes down, and that’s what creates the crisis and allows them to come in with their solutions… They say the government is the problem not the solution, but really, they love government. They just love to be able to take over government. They love government cash. They don’t really want small government.”

 

As we all know, pensions are being blamed for creating this mess, But Bhatti doesn’t buy it.  Before a decade of pension holidays, he says, most pension systems were solvent. But more importantly, they are a moral and legal commitment to the work force.

“Pensions are actually deferred wages,” he asserts. “As you’re working, the same way your employer might pay into your 401-K in the private sector, or pay Social Security taxes for you, they’re supposed to do that with every single paycheck. The State, the City, the school systems, they’re supposed to do that, too, and in their case it goes into the pensions. But in years with budget crises, instead of finding ways to raise taxes, you have the mayor or the legislature saying this year we’re just not gonna pay. We’re gonna take a pension holiday. So pensions are actually wages for work they’ve already done. And they don’t want to pay it.  Instead they say the problem is that you have too many pensions, even though most pensioners don’t get Social Security and they’ve had modest salaries all their lives.”

And the unfortunate result is that constituencies that might have normally been allies become enemies.

“You have this thing where pensions become the easy scapegoat so that you can pit workers against the community that they serve, and when you have workers pitted against the broader community, the people at the top are off the hook,” he says.

Detroit was forced into bankruptcy. As you’ll see if you watch the first five minutes of this discussion, (it’s a bit complicated), Detroit was only about $200 million behind in its payments. A lot of money, but something that could have been overcome. But the Republican Governor and Legislature scapegoated the City, he says, because they really wanted to bust the pension system, and bankruptcy was the only legal way to do it. Can this happen in Illinois?

“Currently municipalities in Illinois cannot file bankruptcy,” Bhatti explains. “Under the federal bankruptcy code, municipalities, school districts and public agencies can file bankruptcy only if the states authorize them. 26 states including Illinois do not authorize it. So there’s a bill in the Legislature to change that…Rauner’s been touting it as part of his turnaround agenda. He’s created a situation where he’s trying to entice municipal officials to support it, and part of how he’s doing that is by cutting State aid to them.”

In fact, his proposal is to cut by half the amount of revenue the State shares with cities and towns. The hardship this places on smaller towns is intense. Here’s how Bhatti described it in In These Times:

“Like state officials did to Detroit, Rauner inflicted financial hardship on cities and then dangled bankruptcy in front of them as the solution.”

So what does Bhatti recommend at this critical point?

“We need progressive revenue solutions in this state. So we need to pass a millionaire’s tax. We need to restore the higher corporate tax rate that just sun-setted. we need to start looking at a financial transaction tax that taxes transactions at the exchanges on LaSalle Street. We need to start looking at other options like taking some of these bad deals the City entered into like interest rate swaps, and actually suing the banks to get that money back.”

 

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About Ken

Ken's the host of Chicago Newsroom. A former news director, reporter and radio program host, he's also a past Vice President of the Chicago Headline Club.
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