Source: National Journal

Rahm Emanuel is prob­ably go­ing to be reelec­ted may­or of Chica­go, but it won’t have been a pretty road to get there. He failed to garner a ma­jor­ity in the first round of vot­ing, back in Feb­ru­ary-a re­buke, of sorts, from voters, who had four years ago giv­en him 55 per­cent of the first-round vote. As a res­ult, he now faces an April 7 run­off against county of­fi­cial Je­sus “Chuy” Gar­cia.

When polit­ic­al junkies in the rest of the coun­try think about Emanuel, they tend to fo­cus on his le­gendary haught­i­ness. To take one ex­ample: A con­stitu­ent who met with Emanuel earli­er this month to protest the clos­ing of men­tal-health clin­ics com­plained that the may­or had yelled, “You’re gonna re­spect me!” (Emanuel’s camp denied to The Huff­ing­ton Post that the may­or had yelled.) Such haught­i­ness has cer­tainly hurt Emanuel dur­ing this cam­paign. Where­as his pre­de­cessor, Richard M. Da­ley, was per­fectly cap­able of ar­rog­ance, his per­son­al­ity didn’t seem to of­fend Chica­goans the same way Emanuel’s does. Da­ley had the bluster of the com­mon man; Emanuel comes across as im­per­i­ous. “Da­ley could be your broth­er or uncle,” one labor lead­er told me re­cently. “Rahm is more up­per class.” The press in Chica­go has been fond of re­count­ing how Emanuel was seen with his ex­tremely wealthy friend, Illinois’s Re­pub­lic­an gov­ernor, Bruce Rau­ner, at a posh Montana re­sort car­ry­ing a bottle of wine that’s only avail­able through an ex­clus­ive buy­er’s club-which costs six fig­ures to join.

But while Emanuel’s col­or­ful per­son­al­ity has cer­tainly been a key factor in the minds of many voters, it isn’t-or at least shouldn’t be-the real story about Chica­go polit­ics right now. Per­haps more than any oth­er ma­jor city in Amer­ica, Chica­go is fa­cing a truly grave set of prob­lems-prob­lems that are es­sen­tially more ex­treme ver­sions of the chal­lenges con­front­ing city gov­ern­ments across the coun­try.

The quandar­ies be­gin with Chica­go’s dra­mat­ic so­cial di­vide. To an even great­er ex­tent than is the case in, say, New York or Phil­adelphia, Chica­go has be­come two en­tirely sep­ar­ate cit­ies. One is a bust­ling met­ro­pol­is that in­cludes the Loop, Michigan Av­en­ue’s Mag­ni­fi­cent Mile, and the Gold Coast, as well as the city’s well-to-do, work­ing-class, and up­wardly mo­bile im­mig­rant neigh­bor­hoods. The oth­er Chica­go con­sists of im­pov­er­ished neigh­bor­hoods on the far South and West Sides, primar­ily pop­u­lated by Afric­an-Amer­ic­ans. These places have re­mained bey­ond the reach of the city’s re­cov­ery from the Great Re­ces­sion.

Mean­while, even as it grapples with this ex­treme gap, Chica­go is suf­fer­ing from a severe fisc­al crisis. Like plenty of oth­er mu­ni­cip­al­it­ies, Chica­go lacks the rev­en­ue to pay its bills, par­tic­u­larly its pen­sion ob­lig­a­tions to city work­ers. Ac­cord­ing to a 2013 Pew re­port, 61 oth­er U.S. cit­ies face sim­il­ar dif­fi­culties, but Chica­go’s situ­ation is one of the worst. “Voters must real­ize we are fa­cing the greatest eco­nom­ic crisis since the Great De­pres­sion,” says Roosevelt Uni­versity’s Paul Green, the doy­en of Chica­go polit­ic­al ex­perts. “If something doesn’t hap­pen, the city is bey­ond the abyss.”

Those prob­lems aren’t really Emanuel’s fault, but his ef­forts to fix them over the past four years haven’t yiel­ded es­pe­cially good res­ults. For his part, Gar­cia-who has been at the fore­front of Latino polit­ics in Chica­go for four dec­ades and who has a his­tory of buck­ing Chica­go’s polit­ic­al es­tab­lish­ment-has run a cam­paign long on gen­er­al pop­u­list cri­ti­cism of the in­cum­bent, but short on cred­ible ideas about what he would do dif­fer­ently.

All of which means that this elec­tion won’t yield much of a man­date for dra­mat­ic solu­tions to Chica­go’s twin crises. After April 7, however, Emanuel or Gar­cia will have no choice but to try. If the gap­ing holes in Chica­go’s so­cial and fisc­al fab­ric can some­how be men­ded, the city will have cre­ated a power­ful blue­print that oth­er large urb­an cen­ters could in the­ory fol­low. And if they can’t be fixed? Then Chica­go may end up serving as a cau­tion­ary tale about the grim polit­ic­al and eco­nom­ic fate await­ing oth­er U.S. cit­ies that put off or wish away their prob­lems.

IF YOU DRIVE through the pre­dom­in­antly Afric­an-Amer­ic­an neigh­bor­hoods on Chica­go’s far South and West Sides, it’s dif­fi­cult not to be struck by the sheer des­ol­a­tion. While much of the city-in­clud­ing Pilsen, a Mex­ic­an-Amer­ic­an area where Gar­cia grew up-teems with life and com­merce, swathes of the South and West Sides seem bereft of hope. Garbage is strewn on empty lots, stores are boarded up, and streets are deser­ted in day­time. In West Engle­wood, for in­stance, from 2008 to 2012, a third of house­holds were be­low poverty, un­em­ploy­ment among those ages 16 and older was 34.7 per­cent, and 30 per­cent lacked high school dip­lo­mas. In River­dale, 61.4 per­cent of house­holds were be­low poverty, 25.4 per­cent were un­em­ployed, and a quarter lacked a high school dip­loma. Ac­cord­ing to the Census Bur­eau, over­all Afric­an-Amer­ic­an un­em­ploy­ment in Chica­go in 2013 was 25 per­cent, con­sid­er­ably high­er than the Afric­an-Amer­ic­an un­em­ploy­ment rates in Amer­ica’s oth­er four largest cit­ies.

Many of Chica­go’s black res­id­ents are the des­cend­ants of those who came from the South in the 1940s to work in the city’s factor­ies, but most of Chica­go’s large factor­ies have shut down or moved over the last 40 years. The city’s key in­dus­tries, primar­ily centered in and around the Loop, are fin­an­cial ser­vices, tour­ism, trans­port­a­tion, lo­gist­ics, health care, and edu­ca­tion. In March 2012, a re­port of the city’s main plan­ning group warned that “the de­mand for low-skilled work­ers con­tin­ues to de­crease” and that “in the years ahead, the de­mand for high-skilled em­ploy­ees will in­crease twice as fast the de­mand for lower-skilled work­ers.” It also pre­dicted grow­ing de­mand for “jobs that re­quire mid-skilled work­ers,” but these are gen­er­ally work­ers who at least have as­so­ci­ate de­grees from com­munity col­leges. The up­shot is that those without high school de­grees, or with only high school de­grees, will in­creas­ingly be un­able to find jobs; and it will be very dif­fi­cult to per­suade busi­nesses, al­most all of which now re­quire some fa­mili­ar­ity with com­puter tech­no­logy, to set up shop in Chica­go’s poor neigh­bor­hoods.

Emanuel’s re­sponse to this prob­lem has primar­ily been to try to im­prove Chica­go’s schools. He got the school board, which he con­trols, to lengthen the school day and year, and in­sti­tute all-day kinder­garten; in his cam­paign, he is prom­ising to ex­pand pre­kinder­garten and give free tu­ition to com­munity col­lege for high school gradu­ates with a B av­er­age. The school board also shut down 49 un­der­used and low-per­form­ing ele­ment­ary schools, and sought to trans­fer those who were dis­placed-12,000 pre­dom­in­antly low-in­come Afric­an-Amer­ic­an stu­dents-to bet­ter-per­form­ing schools. While this move was ini­tially jus­ti­fied on fin­an­cial grounds, it was also part of a broad­er strategy to im­prove stu­dent achieve­ment. The res­ults were mixed: Ac­cord­ing to a Uni­versity of Chica­go study, 93 per­cent of the stu­dents trans­ferred from third-tier to second- or first-tier schools, but only the 21 per­cent who at­ten­ded first-tier schools showed sig­ni­fic­ant schol­ast­ic im­prove­ment.

Emanuel has also made some ef­fort to se­cure in­vest­ments in the South and West Sides. He got Meth­od, a com­pany that makes clean­ing products, to build a small fact­ory on the far South Side that will cre­ate about 100 jobs. And with tax breaks, he in­duced up­scale Whole Foods to put a store in Engle­wood, which, like many Afric­an-Amer­ic­an neigh­bor­hoods, lacked gro­cery stores. Still, it’s un­clear how much these small-scale in­vest­ments, coupled with the city’s edu­ca­tion­al ini­ti­at­ives, can really do to ameli­or­ate the gap between the South and West Sides and the rest of the city.

One of Gar­cia’s cri­ti­cisms of Emanuel is that he has fo­cused on eco­nom­ic de­vel­op­ment down­town, rather than in the poorer neigh­bor­hoods. Emanuel has re­spon­ded by say­ing that it’s “a false choice to pit one part of the city against an­oth­er. No great city does not have a thriv­ing cent­ral city that sup­ports jobs where all parts of the city go to.” Emanuel isn’t wrong, ex­actly. But it’s also true that he has squandered tax breaks in­ten­ded for blighted areas on lux­ury ho­tels, high rises, and an arena for De­Paul’s bas­ket­ball team in the South and West Loop-all while lur­ing Yelp and Mo­torola Mo­bil­ity to down­town Chica­go and put­ting money in­to Mc­Cormick Place and Navy Pier, two key tour­ist des­tin­a­tions.

And yet, while Gar­cia and his al­lies have le­git­im­ate cri­ti­cisms of Emanuel’s eco­nom­ic-de­vel­op­ment ef­forts, they have not pro­duced any­thing re­sem­bling a vi­able al­tern­at­ive. When I asked Gar­cia dur­ing a re­cent in­ter­view in his cam­paign headquar­ters what he would do about Chica­go’s so­cioeco­nom­ic di­vide, he said there was “the po­ten­tial on the West Side for loc­al busi­nesspeople to in­vest in co­oper­at­ive en­ter­prises, work­er-owned en­ter­prises.” I asked him for an ex­ample, and he cited New Era Win­dows, which had taken over the old Re­pub­lic Win­dows plant, and which pro­duces re­place­ment win­dows. “Check it out,” he told me. “It’s an ex­ample of what can be done if there is polit­ic­al will and an un­der­stand­ing on what needs to be done, par­tic­u­larly on the West and South Sides, to cre­ate op­por­tun­it­ies.”

I checked it out mid­day on a sunny Thursday. I found an old build­ing with the com­pany’s name painted on the wall, but the park­ing lot was nearly deser­ted. A work­er at a neigh­bor­ing busi­ness poin­ted me to a door, but it was locked. In an ad­join­ing build­ing, someone else sug­ges­ted I look in a suite of of­fices on the third floor, but there was no one there or on the oth­er floors. I called the com­pany’s num­ber later, and the per­son on the phone as­sured me that the com­pany is still op­er­at­ing, but “might have been closed” when I tried to vis­it. I asked her how many people the com­pany em­ployed, and she said 16.

To be sure, the fate of New Era Win­dows won’t de­term­ine the vi­ab­il­ity of Gar­cia’s strategy. But it points to the dif­fi­culties in­her­ent in any at­tempt to re­vive the South and West Sides. In his de­bate with Emanuel, Gar­cia called for “at­tract­ing mod­ern in­dustry and man­u­fac­tur­ing” to Chica­go’s neigh­bor­hoods. If by mod­ern in­dustry, he means Yelp and Linked­In, then the prob­lem will be that these kind of firms want to loc­ate near oth­er fin­an­cial and busi­ness ser­vices down­town. And if he means man­u­fac­tur­ing on a scale that Chica­go once en­joyed, the long-term trends in the loc­al eco­nomy are run­ning against such a strategy. As one head of an eco­nom­ic-de­vel­op­ment or­gan­iz­a­tion in a minor­ity neigh­bor­hood told me, hopes of re­viv­ing man­u­fac­tur­ing on a large scale are a “pipe dream.”

AS IF THE so­cioeco­nom­ic gap wasn’t hard enough to solve on its own, it’s made even more dif­fi­cult by the loc­al gov­ern­ment’s ter­rible fisc­al con­di­tion. Chica­go’s fin­ances, like those of some oth­er city gov­ern­ments, have suffered from the boom-bust cycle of the past 20 years. The city grew com­pla­cent dur­ing the boom, fail­ing to set aside funds for the fu­ture, and then didn’t take the ne­ces­sary cor­rect­ive steps when the eco­nomy faltered. The blame largely be­longs to Da­ley, Emanuel’s pre­de­cessor, who lav­ished money on civic pro­jects and doled out funds to ap­pease al­der­men without rais­ing taxes. When fi­nally faced with fall­ing rev­en­ues, he un­der­took sev­er­al con­tro­ver­sial ef­forts at privat­iz­a­tion, but the ini­tial funds the city gained quickly evap­or­ated.

The heart of Chica­go’s cur­rent fisc­al woes is its pen­sion sys­tem. The city’s pub­lic work­ers, in­clud­ing teach­ers, do not re­ceive So­cial Se­cur­ity. In­stead, they get pen­sions from the city. The gov­ern­ment pays for these pen­sions through funds that con­sist of em­ploy­ees’ and tax­pay­ers’ con­tri­bu­tions and what Chica­go earns on in­vest­ments from these con­tri­bu­tions. Ac­cord­ing to Uni­versity of Chica­go pub­lic-policy ex­pert Mi­chael Bel­sky, in­vest­ment earn­ings have gen­er­ally ac­coun­ted for two-thirds of the total funds.

Private pen­sion funds are usu­ally re­quired to main­tain as­sets equal to 100 per­cent of their total li­ab­il­it­ies, meas­ured as what would be re­quired to pay be­ne­fits to ex­ist­ing work­ers and re­tir­ees; but be­cause cit­ies and states can count on be­ing able to tax to cov­er their ob­lig­a­tions, rat­ing agen­cies and reg­u­lat­ors be­lieve their as­sets need to cov­er only about 80 per­cent of their total li­ab­il­it­ies. Chica­go’s pen­sion funds re­mained at that level or above un­til the early 2000s. Then they began to drop pre­cip­it­ously. The main cause was the dot-com re­ces­sion of 2001 and 2002 and the Great Re­ces­sion that began in 2007-both of which caused the funds’ earn­ings on in­vest­ments to plum­met. In ad­di­tion, city con­tri­bu­tions through tax­pay­ers, which were cal­cu­lated us­ing a fixed for­mula that didn’t re­flect in­creases in li­ab­il­it­ies, failed to keep pace; and for sev­er­al years, Da­ley didn’t put even the tax money that the city did col­lect back in­to the funds. At the same time, the pen­sion bill it­self in­creased due to a great­er life span among re­tir­ees and be­ne­fit in­creases gran­ted to pub­lic em­ploy­ees. By the end of 2012, the as­sets in the city’s funds amoun­ted to just 36 per­cent of their li­ab­il­it­ies.

At this dis­mal level, the pen­sion funds began to use their as­sets to pay off im­me­di­ate be­ne­fits. That meant the total funds were be­ing stead­ily re­duced, which meant the in­vest­ment in­come was also go­ing down. The pen­sion funds were in a death spir­al-and they still are.

If pen­sions were a small part of a city’s budget, then all of this wouldn’t mat­ter that much. But pen­sions rep­res­ent one of the largest ex­pendit­ures in Chica­go’s budget (which is also true of oth­er cit­ies). Of a budget that runs around $8 bil­lion, pen­sion costs will amount to about $1.1 bil­lion in 2015, and will rise to $1.2 bil­lion in 2016 and $1.3 bil­lion in 2017.

The rat­ing agen­cies have taken note. In 2013, Moody’s is­sued a “su­per down­grade,” re­du­cing Chica­go’s cred­it rat­ing three notches. Last Feb­ru­ary, Moody’s took Chica­go down an­oth­er notch, leav­ing it only three steps from junk-bond status. Lower bond rat­ings mean high­er in­terest rates, mak­ing it more ex­pens­ive for Chica­go to bor­row money to cov­er its de­fi­cits. Oth­er cit­ies have faced sim­il­ar crises, but among ma­jor Amer­ic­an cit­ies, only De­troit has a lower bond rat­ing than Chica­go.

Faced with a budget crisis of this mag­nitude, Emanuel did make some cuts, shut­ter­ing some schools and men­tal-health clin­ics. But these meas­ures mainly in­furi­ated the af­fected Chica­goans while gen­er­at­ing few sav­ings. He also op­ted for a dodgy bond strategy used earli­er by Da­ley called “scoop and toss”: He sold new city bonds with high in­terest rates so that he could buy the prin­cip­al of bonds that were com­ing due and use the dif­fer­ence to make up the de­fi­cit. The strategy as­sumed Chica­go’s im­min­ent re­cov­ery from the Great Re­ces­sion, which would raise rev­en­ues, but the city, which de­pends on lag­ging busi­ness and fin­an­cial ser­vices, still had not fully re­covered. As a res­ult, Emanuel’s strategy raised Chica­go’s in­terest costs and con­trib­uted to Moody’s 2013 de­cision.

In April 2014, Emanuel fi­nally put forth a com­pre­hens­ive strategy for re­du­cing the de­fi­cits on two of the city’s main pen­sion plans. He sought to in­crease city work­ers’ con­tri­bu­tions and re­duce the be­ne­fits paid out to re­tir­ees, while in­creas­ing the tax­pay­er con­tri­bu­tion by rais­ing prop­erty taxes. Every­one had to make sac­ri­fices, he ar­gued.

But by Illinois law, he had to seek ap­prov­al from the state gov­ern­ment for any modi­fic­a­tion of the be­ne­fit or con­trib­ut­or for­mu­las. Then-Gov­ernor Pat Quinn, fa­cing reelec­tion, re­fused to ap­prove a prop­erty-tax hike, and Emanuel had to com­prom­ise on a bill that kept the be­ne­fit cuts and in­creases in work­er con­tri­bu­tions but lim­ited rev­en­ue in­creases to a tele­phone tax. He sup­ple­men­ted this tele­phone tax with vari­ous fees and fines-in­clud­ing those from ex­pan­ded use of red-light and speed­ing cam­er­as-that have proved ex­ceed­ingly un­pop­u­lar. Com­plic­at­ing mat­ters fur­ther, some uni­ons, cit­ing a state con­sti­tu­tion­al pro­vi­sion that pro­hib­its be­ne­fit cuts without the be­ne­fi­ciar­ies’ ap­prov­al, got the deal thrown out in a lower court. It is now be­ing con­sidered by the Illinois Su­preme Court, and it is very pos­sible that it will com­pletely col­lapse.

In his cam­paign this year, Emanuel has pro­posed broad­en­ing taxes to in­clude ser­vices by ac­count­ants, law­yers, and oth­er pro­fes­sion­als, and also es­tab­lish­ing a casino, whose rev­en­ue would be ded­ic­ated to meet­ing pen­sion ob­lig­a­tions. He has said he op­poses rais­ing prop­erty taxes, but one of his chief lieu­ten­ants on the city coun­cil ac­know­ledged that the city would even­tu­ally have to do so. High­er prop­erty taxes, coupled with mod­est re­tir­ee be­ne­fit cuts and an in­crease in city-work­er con­tri­bu­tions, seem like the only plaus­ible solu­tion-even though this ap­proach runs afoul of the pub­lic’s deep aver­sion to tax in­creases and pub­lic work­ers’ res­ist­ance to any re­duc­tion in their be­ne­fits.

Gar­cia, mean­while, has pro­posed meas­ures that, in Paul Green’s words, are “either il­leg­al or im­possible.” He has said he wants to im­pose a gradu­ated state in­come tax, which is il­leg­al un­der the state con­sti­tu­tion and would re­quire a con­sti­tu­tion­al amend­ment passed by a three-fifths vote in the state Le­gis­lature. (Gar­cia’s main back­er, the Chica­go Teach­ers Uni­on, wants to im­pose a fin­an­cial-trans­ac­tions tax on city firms, which could drive one of the Chica­go’s most im­port­ant in­dus­tries out of town.) Gar­cia has also said he op­poses re­du­cing pen­sion be­ne­fits, which would put the onus of resolv­ing the crisis en­tirely on tax­pay­ers. In short, if there is a vi­able al­tern­at­ive to Emanuel’s ap­proach, Gar­cia is not air­ing it.

EMANUEL IS WELL ahead in the polls, but Gar­cia could still pull an up­set. As vet­er­an cam­paign con­sult­ant Don Rose, who is ad­vising Gar­cia, has noted, anti­es­tab­lish­ment may­or­al chal­lengers Jane Byrne and Har­old Wash­ing­ton were both trail­ing in the polls but man­aged to win on Elec­tion Day.

Gar­cia’s elec­tion hopes rest on rais­ing turnout among the city’s Lati­nos and win­ning re­spect­able mar­gins in the Afric­an-Amer­ic­an and white com­munit­ies. He has been en­dorsed by Jesse Jack­son, Wil­lie Wilson, and oth­er prom­in­ent Chica­go black lead­ers, but Emanuel has the sup­port of the city’s most im­port­ant black lead­er, Pres­id­ent Obama. And while Gar­cia has cham­pioned a polit­ic­al al­li­ance between the city’s Latino and Afric­an-Amer­ic­an voters, there re­mains a linger­ing hos­til­ity between the two groups. “It’s a jobs is­sue, an is­sue of con­tracts fa­vor­ing His­pan­ic firms,” ex­plains my former col­league Salim Muwakkil, now a top Chica­go talk-show host. “You hear things like, ‘Did you ever see black busi­nesses in Pilsen? But we see His­pan­ic busi­nesses in our com­munity.‘“Š”

On Chica­go’s primar­ily white North Side, Emanuel seems to en­joy an ad­vant­age. One Chica­go polit­ic­al con­sult­ant, who is neut­ral in the race, says that many North Siders voted for Gar­cia in Feb­ru­ary be­cause they “wanted to punch Rahm in the nose.” But now, hav­ing made their point, “they will vote for Rahm in April.” A North Side small-busi­ness own­er and lib­er­al Demo­crat I know told me why. “I voted in the primary be­cause I really like our al­der­man,” she says. “Since I was at the poll, I cast an ‘any­body-but-Rahm’ vote. Rahm is not a likable guy. Sadly, he has no real com­pet­i­tion. Chuy is a nice guy but doesn’t seem to have a clue what he would do if elec­ted. When I go back for the fi­nal vote, I will vote for Rahm. Maybe he has a chance of fix­ing some of the fin­an­cial prob­lems.”

And maybe he does have a chance-par­tic­u­larly if a blis­ter­ing head­wind from the U.S. eco­nomy blows through Chica­go, lift­ing up its rev­en­ues and in­creas­ing the city’s in­vest­ment earn­ings. But with Europe reel­ing, and parts of Asia slow­ing down, Amer­ica doesn’t seem poised to ex­per­i­ence any­thing like the boom of the 1990s. As­sum­ing it does not, Chica­go’s fin­ances will con­tin­ue to be im­periled. The day of reck­on­ing will near, as pen­sion bills in­crease. The city’s so­cial di­vide will likely con­tin­ue to worsen. And who­ever ends up serving as may­or will face a daunt­ing set of chal­lenges, with few clear solu­tions in sight.

This article was originally published in the National Journal.