Detroit's bankruptcy filing has a message for the rest of the county: Your city or state might be next if you don't fix your finances! Unlike the federal government, cities and states can't "print" the money to pay for their promises. And the most egregious promises have been made to public workers, many of whom are now retired and living on their pensions.
I'm especially aware of that as a lifelong resident of the city of Chicago, which has just suffered a triple credit rating downgrade because of its huge unfunded city pension obligations. Since Chicago's pension funding depends on state support, and Springfield is in a pension stalemate, the problem is directly in the hands of the mayor and in the pockets of city residents. It's a political and financial nightmare.
Even worse, Illinois is in a financial mess nearly as devastating as Detroit, despite raising personal and corporate tax rates. In cutting Illinois' bond rating last month, Fitch ratings service noted: "Illinois' annual pension funding requirements have been increasing significantly and the growing pension payments are crowding out other expenditure growth and absorbing revenue growth."
Which brings us back to Chicago, which is left mostly on its own to fill the gap. Teacher layoffs and school closings, along with delayed snow removal and pothole repair, are just the start. Police and fire safety consume a large part of the budget. (Notably, the parental protests about school closings revolve around the issue of longer, dangerous walks to school through rival gang territory -- thus exposing another literally fatal flaw of the city's financial situation, the lack of police resources.)
But what stands out most in Chicago's budget is the huge contributions that must be made to fund pensions of civil servants who worked their lives on a promise of retirement benefits. In previous city bankruptcies, notably Stockton, Calif., retiree pensions were left untouched (though health care benefits were diminished), and bondholders took a hit.
In Detroit, it appears that the issue will be the constitutionality of cutting actual pension benefits -- the monthly checks being received by current retirees. Already the challenge is in the courts: Can bankruptcy law, which requires creditors to share in the losses, supersede a state constitution, which mandates that pensions are an inviolable contract?
Watch Detroit carefully because it will likely set a precedent in dealing with the sanctity of municipal pension benefits. Chicago is walking down the path of Detroit -- and Mayor Rahm Emanuel is well aware of the crisis.
There are only two choices for cities: raise taxes or cut spending, including wages and retiree benefits. Either way, you devastate the remaining middle-class tax base, setting the stage for further decline.
When I made this very point in a series of columns four years ago, I was greeted with jeers of disbelief. Now, there's a sense that Detroit is a "special case," perhaps a city too dependent on one industry. But Detroit is no different than many other cities and states, which have tolerated political financial shenanigans that diverted taxpayer resources and bought votes.
The federal government gets away with it -- or has, so far -- because they have unlimited borrowing power, effectively the power to create the money. States and cities can't print. Detroit is at the end of the road, and Chicago is the next stop on that highway. It's not politics anymore -- it's really all about the money. And that's the Savage Truth!