Expert offers potential solutions in wake of Chicago's credit downgrade

Moody's recently downgraded Chicago's credit rating, principally for its troubles with its pension program.  

With the city of Chicago receiving yet another credit rating downgrade on March 28, Illinois Policy Institute Vice President Ted Dabrowski recently offered his advice on how the Windy City can rebound.

Six months ago, Moody's downgraded Chicago principally for its troubles with its government-worker pension program. Fitch Ratings followed suit this year -- calling the downgrade "among the worst of the possible outcomes" for the city's credit quality -- after the Illinois Supreme Court rejected Chicago's municipal workers' and laborers' pension system reforms March 24.

"The Supreme Court has been pretty consistent in its recent rulings at the state level," Dabrowski said. "Its interpretation of the Constitution is that benefits can't be diminished and that the pension reform laws that were passed didn't meet the muster of the Supreme Court."

With the city's pension system unresolved, Moody's detailed in its report that taxpayers' contributions would continue to rise over the next 15 years.

"There should be a huge concern for taxpayers," Dabrowski said. "Pensions both at the state and the city level are the biggest problem Illinois has today, and without resolving the pension crisis, we are going to see the continuation of more and more tax increases. We are going to see more and more people leave the city, leave Chicago and leave the state, and we will see more and more core government services cut to make way for these pension payments."

Consequently, Fitch also gave Chicago a negative outlook in addition to its rating, unless "the city presents a realistic plan that puts the pension funds on an affordable path toward solvency."

But, according to Dabrowski, the Supreme Court's ruling regarding Chicago's pensions wasn't all negative.

"There was some good news in the Supreme Court ruling, some silver lining, if you will, and the Supreme Court says that they believe that employees -- either individually or through collective bargaining through their unions -- can negotiate some changes to the pension benefits as long as what they receive in exchange for those benefits is agreed upon by the employee," Dabrowski said.

This "silver lining" means that labor unions may be able to negotiate some much-needed changes that may offer relief for city and state budgets while providing more pension security for employees.

As for what Chicago can do to sidestep an impending downgrade, Dabrowski sees offering 401(k) plans to workers as an effective solution.

"They should offer all existing workers the option for their benefits going forward also as a 401(k) style plan," he said. "If for whatever reason unions don't want to reform pensions or the state legislature doesn't want to reform pensions, the city should also be allowed to go bankrupt if it needs to in order to reorganize its debt and to relieve the pressure on taxpayers."

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