Lessons From Chicago

As these words are being penned, Chicago’s public school system is teetering on the verge of insolvency. Facing a current budget deficit approaching a half billion dollars, the system once headed by former U.S. Secretary of Education Arne Duncan has become something of a political football being kicked around by the city’s Democratic mayor, Rahm Emanuel, and Illinois’ Republican governor, Bruce Rauner. As the economic and political stakes mount, the rhetoric has become heated.

Mr. Rauner places the blame for CPS’ fiscal woes squarely on Mr. Emanuel’s shoulders. “The mayor has failed on this,” says the Governor. “He’s failed on public safety, he’s failed on schools, he’s failed on jobs in the neighborhoods, he’s failed on taxes, he’s failed on reforms. And I’m tired of it. We have to take action.”

The action Governor Rauner and fellow Republicans have in mind comes in the form of legislation that would create an independent state authority charged with the management of the CPS until such time as the system regains its financial footing. The arrangement would also permit the district to declare bankruptcy, which might permit the voiding of current union contracts and allow adjustments to pension benefits. Needless to say, such possibilities do not sit well with the teachers union, which is pressuring the mayor to stand firm.

Said Mr. Emanuel through a spokesperson: “Giving control of our children’s future to a governor who can’t pass his own budget, who is racking up billions in unpaid bills, and who is crippling higher education across the state makes zero sense. With just a few weeks to go before delivering a second budget address without having passed his first budget, it’s clear the Republicans in Springfield are trying desperately to distract from their own failures.”

Both houses of the Illinois legislature are currently controlled by Democrats, meaning there’s little chance that Mr. Rauner’s proposals will win passage. Instead, the legislation proposed by the Republicans is seen as a pressuring tactic designed to force concessions from the union. A ‘serious offer’ tendered by the district has, however, been unanimously rejected by a 40-member bargaining team representing the union.

Chicagoans need only look eastward, across the lake to Michigan, where Detroit’s public schools have operated under the control of a state appointed manager for the past six years, and are now circling the drain. Black mold is clearly visible inside classrooms. Cockroaches and rats scamper through school hallways. Heating systems are inoperative (in 20-degree weather), and teachers are protesting by calling in sick, because Michigan law prevents them from striking.

Chicago is not Detroit. The latter metropolis suffers from a malignant set of demographic dynamics that have plunged its public education system into a death spiral. Chicago’s primary problem is considerably more generalizable: moral hazard. Simply put, moral hazard describes a tendency or condition in which one person (or group) takes greater risks owing to reliance upon others to bear the burden. Chicago’s public schools became overly dependent upon state funding to balance its budget, and past leaders committed to generous pension obligations their successors would have to fulfill.

Such behavior is by no means unique to Chicago and Illinois. California would do well to pay heed to the Windy City’s current dilemma, and its attendant political spillover. For, in a state like ours, in which boom-bust cycles are the rule, it is particularly tempting to succumb to moral hazard when the public coffers are flush with cash, as is true of California at present.

Moral hazard is baked into the very fabric of California’s approach to school finance. When Proposition 98 school spending increases, each higher spending level becomes a mandatory floor for subsequent years. But the state is not always able to make good on this commitment, particularly during bust years. When revenue is lean the schools receive less money than required by law, which is why public education leaders can rightfully say that the schools are owed money by the state.

Fortunately, California’s fourth-term governor, Jerry Brown, gets it. To his credit, Governor Brown is asking legislators to address the state’s current obligations before making additional promises. And he’s doing so in a time of plenty. One need only watch Mr. Brown’s recent ‘State of the State Address’ to literally get the message.

The Governor observes that Department of Finance economists predict that when (not if) the next recession arrives, even should it be relatively mild, the state stands to suffer a $55 billion decline in revenue over a three-year period. When Mr. Brown speaks of current state pension obligations, one can clearly detect sarcasm in his words and body posture as he makes reference to a financing plan”assuming a favorable return of seven-and-a-half percent, forever.” While speaking of $72 billion in healthcare obligations to future state employees, the Governor said: “These liabilities are so massive that it’s tempting to ignore them,” before adding that it is our “moral obligation” to address them before we make new commitments.

Kudos to you, Governor Brown. If our lawmakers heed your prudent exhortations perhaps California can avoid the painful lessons of Chicago.


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