Thursday, June 12, 2014

Saving Chicago: Can Rahm Emanuel save the country's third largest city?

IN MAY 2011 the city of Chicago swore in its first new mayor in 22 years. The new boss, Rahm Emanuel, was a local man but natives liked to quibble that his family moved to a plush suburb when he was nine. To outsiders Mr Emanuel is as authentically Chicagoan as they come. His resume was impressive too. He had just returned from a spell as President Barack Obama's chief of staff, had represented Illinois's 5th district as a congressman, and had served as an aide under President Clinton. But Mr Emanuel was finished with Washington, calling it "dysfunctional and broken". He was looking for a role where he could get things done. One of the non-profane remarks that Mr Emanuel is famous for making is, "you never want a serious crisis go to waste". In Chicago, Mr Emanuel had found both crisis and opportunity. 

Two months earlier, a local financial watchdog The Civic Federation warned that the city had been running a structural budget deficit for each of the last ten years. These had been filled with non-recurring revenue sources--such as the $1 billion privatisation of the city's parking meters. The problem had been growing, and in 2011 the shortfall was expected to run to $655m--about 11% of the city budget. All the while, the city's debt had grown alarmingly, its credit ratings had been sliding and the funding ratios of its pension funds had been plummeting. At the time unfunded liabilities were around $26.8 billion. More recently this was calculated at $19 billion—more than five times the city’s operating budget.

More trouble lay on the horizon. While the mayoral race was underway, a new state law was passed requiring the city make higher pension contributions in  2015. Unless the state legislature in Springfield takes action, an additional $600m must be found next year. Laurence Msall of the Civic Federation, says that the mayor inherited a financial mess but that pensions were "a time bomb". The mayor cannot fix this without help from state legislators in Springfield. Yet if the problem is not dealt with, further credit downgrades are possible. These will trigger greatly increased capital requirements for the city, which will spell further trouble.

As Mayor, Mr Emanuel has been fond of saying that the decisions he makes in the next two or three years will determine what the city will look like for the next two or three decades. They will decide, he says, if the city will remain in the list of top cities that drive the global economy. This is not empty rhetoric. Citizens feel that the most pressing issues in town are schools, crime and jobs but the backdrop remains the question of whether the city can be put onto a sustainable trajectory.

Raising taxes and revenue can only help up to a point. For example, a 75% increase in property taxes, says Mr Msall, would give the city the money to pay the police and firefighters pensions but nothing else. At the same time, the city is still living beyond its means and may need to continue the unpopular business of cutting services. Yet the bankruptcy of Detroit showed how dangerous the combination of raising taxes and cutting services is when workers and businesses are so mobile. Chicago needs to encourage more people to stay. In the first decade of the millennium, 200,000 people voted with their feet and left Chicago. Although it remains America’s third-largest city, just, its population of 2.7m is down from a peak of 3.6m in 1950. 

Unlike many of America’s other struggling, postindustrial rust-belt cities, Chicago reinvented itself and continues to do so. It has a diverse economy and is an important financial centre, with many large companies headquartered downtown or nearby. There are also many leading educational institutions, a relatively high proportion of graduates, and the city is set within one of the nation's most important transportation and logistics centres. Chicago also regularly appears in the top of global city attractiveness ratings thanks to its great museums, parks, food and lakefront. This allows it to continue to draw people, businesses and ideas into its orbit. Indeed in the decade that saw a decline in the city's population, the number living in the city centre has grown faster than any other city in America--rising 36%. 

The man with the plan
Ideologically, Mr Emanuel is a centrist Democrat, cut from the same cloth as President Clinton, with an emphasis on liberty, self-help and private-sector driven growth as the means of achieving progressive ideals. To the rest of the world he would be recognizable as a third way politician, someone who the business sector sees as one of their own but who is loathed by real left. In Chicago the disenchanted have dubbed him “Mayor 1%” for his affinity for out-sourcing and his ties to Wall Street. Yet Mr Emanuel is by no means remarkable in his centrism: the needs of big cities all over the country have drawn politicians towards the pragmatic middle. Even Bill de Blasio, in New York, for all his rabble rousing was forced to make concessions to charter schools when in office.

Mr Emanuel brings much to the table as one of the most well-connected politicians in America. He is an odd mix of strongly disciplined--he gets up at 5.30am every morning to exercise--yet lacking in patience, something his wife teases him about. And with a council of aldermen who rubber stamp anything he proposes, Mr Emanuel is a powerful force in the city. Journalists often complain that he is rude. Yet his outstanding ability to raise funds for political and pet philanthropic causes (something Mr Clinton described as a “genius at raising money”) must mean he can turn on the charm.

In his first budget he made deep cuts but described the package as "honest". This is a pretty symbolic choice of words in a city known for its institutionalized corruption, and an inability to live within its means. Mr Emanuel found $417m in savings from redundancies, spending cuts, increased debt collection and other reforms including consolidations of police and fire departments. There were also unpopular cuts to library funding, mental health services and the free water that had been given to non-profit organisations. Rubbish collection was taken out of the hands of individual city council members, known as aldermen, and put it onto an efficient, grid-based collection system that was partly privatized. Revenue was raised through increases to a variety of fees, fines and rates but he steered clear of property and sales tax increases. Within this budget there was money to update the city’s ancient water system. Subsequent budgets have not seen such large redundancies, but have continued his basic trend of rationalization, privatization and modernization—such as a project to update the city's L trains that travel deep into Chicago's black South Side. 

There have been many successes in the first three years. Downtown is still booming, companies are moving in and a new technology incubator is proving its worth. Improvements to transportation, parks, bicycling, libraries, wifi access and the riverfront are all helping to redefine Chicago as a 21st century city. Although 26,655 jobs have been announced by the mayor, these sorts of figures need to be treated with caution. Tourism, though, is a more unambiguous success. Increasing this has been a focus since the Mayor took office, and domestic visitors have increased sharply.

Yet it is on the nitty-gritty issues of schools, crime and that much of the next election will be fought. When he arrived Mr Emanuel's focus was on education and on attracting jobs, investment and tourism to the city. Crime was lower on the list, a decision that turned out to be a mistake when in 2012 the homicide rates spiked and the city recorded more than 500 homicides that year. Chicago was dubbed the nation's murder capital as murders were far higher than New York City and Los Angeles, which have larger populations. In truth, though, many other cities have far higher per capita rates. Yet the violence also disproportionately afflicted the city's African American neighborhoods on the South and West sides of this racially segregated city—which looks bad.

Much has changed since then. While a recent dive in crime figures seems too good to be true, the city has started to think far more strategically about how to tackle these problems. These include strategies to keep kids in school, offer summer jobs and develop the social skills associated with reductions in violence and anti-social behavior--a program called Becoming a Man. Some of the changes will take time to pay off but will pay dividends say observers. 

An crime and education are connected: it is difficult to have a high school drop out rate of 60% for African American boys and not have this translate into a crime problem. Mr Emanuel has tackled the school system with the same zeal to modernize, privatize and rationalize—something that has at times appeared heartless. Last year this translated into the closure of 50 schools, mostly in African American neighbourhoods. The reasoning was that of these schools were under enrolled, under performing or both. And more than $200m of savings from the consolidations were used to make investments into the receiving schools. At the same time, he has pushed forward with a reform agenda comprising more charter schools, greater teacher accountability, more early years education and a longer school day.

Much of his school agenda is, unsurprisingly, disliked by teacher's unions, and his fight over a longer school day and other reforms led teachers to strike for a week in 2012. In the end, both sides gave a little. Mr Emanuel got his longer school day and the children of Chicago now have an extra 2.5 years of schooling between kindergarten and high school. The unions got what they wanted on merit pay and rehiring fired teachers. Yet the school closures last year cost Mr Emanuel most dearly in terms of political currency. Many parents and teachers were deeply upset, and the poor neighborhoods which lost their schools were angry about the abandoned buildings and loss of good, middle-class jobs in places that had little else. 

Yet there are signs that the city is, overall, on the right track. The graduation rate continues to rise and went from 58% in 2011 to 65% in 2013. Moreover, Mr Emanuel has made a substantial, but largely under-appreciated, investment to improve the city's awful community colleges. Prior to his arrival only 7% of first-time, full-time students graduated and enrollment was plummeting. The community colleges have been reorganized to deliver qualifications needed by the main industries in the region such as logistics, healthcare and advanced manufacturing. Many local companies are struggling to find the skilled workers that they need, and local kids need jobs. The community colleges are now growing and have projected a 13% graduation rate for 2013. They are on track to meet a goal a graduation rate of over 20% by 2018. 

With a mayoral election due in February 2015, Mr Emanuel has a lot of work to do. A recent poll found that only one in five voters thought he was doing a better job than his predecessor and only 29% would support him if the election were held today. There are mixed reports about his standing with African Americans, and concerns about support from Latinos in a recent poll are likely overblown. As one might expect, his fund-raising is going well and he has $7m in the bank so far.

One of Mr Emanuel's problems is that he isn't anything like his predecessor Mr Daley. This should be good except locals seem to have forgotten the bad old days when the mayor sat on top of a machine that explicitly doled out jobs, city contracts and favors in exchange for campaign contributions, loyalty and votes. People felt that Mr Daley was everywhere in their city. He was. By comparison, Mr Emanuel seems more like a distant CEO.

There is speculation he may be challenged in next year’s election by Cook County board president, Tony Preckwinkle. She is probably the only person who could muster a serious challenge. Yet for all the criticism Mr Emanuel is facing from the unions, he has managed to negotiate deals with some of them to cut retirement benefits in exchange for raised city contributions funded by an increase to property taxes. Mr Emanuel’s argument is that he can put these funds on a sound footing. The legislation necessary for this to happen has just been signed by the Governor Pat Quinn. Next are the more difficult unions to tackle: police, firefighters and teacher’s. Nothing is likely to happen before the mid-term elections.

Although there is a thread of modern thought that suggests that mayors are the significant forces in the American economy, Chicago’s problems highlight the fact that there are many issues that lie outside a mayor’s control—no matter what image he may choose to project. Untraceable guns slip easily into Chicago, the city has no control over the jails or judges which are run by the county, and the penalties for carrying illegal guns are incredibly weak but would need to be addressed by legislators in Springfield. And while Mr Emanuel has pushed for legislation that would allow casinos in the city and bring in additional revenue, the governor has not yet supported a bill. 

Mr Emanuel’s strengths are also his greatest weaknesses. His impatience and rudeness may have helped the city move faster but have also won him enemies and detractors, for example by needlessly upsetting the head of the Chicago Teacher’s Union. And he has done far less than he ought to to reform accountability over how money raised from special taxation districts is spent. Yet for all his faults and rough edges, Mr Emanuel remains the best person to save his home town from its sticky position. He is also the classiest act in town, and his frenetic pace of change in the past three years has been remarkable. If anyone can put Chicago’s financial house in order, it is him. And once that job is done, Chicago has a bright future.