Rahm Emanuel is punching hard at Chicago’s budget 

Like most American cities, Chicago has faced substantial budget deficits for the past few years. For fiscal year 2010-11 (which ends in July), the city faced a shortfall of more than $650 million.

Where Chicago is unusual is in the way it has dealt with this situation: Mayor Richard Daley closed most of the 2011 gap with proceeds from selling the city’s assets — including a toll road and the rights to operate parking meters for the next 75 years — to private operators.

Irresponsible budgeting is a favorite pastime in Illinois, which hasn’t balanced its state budget in more than a decade, so it’s no surprise that Chicago went this route.

However, the strategy cannot work forever.

The city is running low on valuable assets to sell, and the parking meter deal, widely loathed for driving up rates, has soured voters on the idea of looking for similar one-shot revenue generators.

That means incoming Mayor Rahm Emanuel will have to close next year’s budget gap, which will be at least $500 million, the old-fashioned way — with more taxes and/or less spending.

Fortunately for Chicagoans, Emanuel ran on a detailed platform of spending cuts aimed at making the city’s delivery of services cheaper and more efficient. At the center of this plan is a practice pioneered by former Indianapolis Mayor Steve Goldsmith.

In “managed competition,” city departments bid against private contractors to provide services. Emanuel said that since Charlotte, N.C., adopted this practice, public departments have won 70 percent of bids, but the bidding process has encouraged those departments to find ways to do their work more efficiently.

Part of Emanuel’s savings plan involves taking on fiefdoms within city government. Bizarrely, Chicago essentially has 50 separate sanitation departments, divided by City Council wards.

Drivers pick up garbage on routes designed to stay within one ward, where the local alderman uses the operation for patronage. Emanuel expects to save $65 million simply by moving to a more sensible and efficient system of garbage collection.

Also, Emanuel has echoed Michael Madigan, the speaker of the Illinois House of Representatives, by saying he wants to cut the pension benefits that current city employees can accrue in future years.

This reflects a recognition that the city’s out-of-control pension costs will otherwise force it to sharply raise property taxes — especially after Illinois passed a law last year forcing Chicago to make actuarially sound pension contributions (unlike the state, which continues to shirk its own).

These calls for reform might sound surprising from a Democratic politician in a heavily Democratic city. They definitely earned Emanuel the enmity of the city’s public sector unions, none of which endorsed his bid.

And Emanuel is an avowed school reformer, to the chagrin of the Chicago Teachers Union. Nevertheless, he managed to win the February mayoral election with 54 percent of the vote in the six-candidate race.

Emanuel’s platform is mostly a reflection of necessity. Chicago has one of the highest sales tax rates in the country — 9.75 percent, recently reduced from 10.25 percent — and the state income tax recently rose from 3 to 5 percent.

A massive budget gap at the state level means future tax increases are likely. Like Gov. Andrew Cuomo in New York, Emanuel is recognizing that there is no room left to tax more, and that it is time for both Republicans and Democrats to wield the budget ax.

Emanuel had a reputation for leading with an iron fist in Washington, D.C. If he succeeds in getting a handle on Chicago’s budget, he could set an example for lawmakers in Springfield and around the country about the benefits of tough and smart leadership.

Josh Barro is a senior fellow at the Manhattan Institute and editor of PublicSectorInc.org, which shines a spotlight on public sector issues in state and city governments. This article is adapted from the spring issue of City Journal.

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