Rahm Emanuel speaks to the press on Election Day in Chicago last month. He failed to garner a majority of votes. (Photo: Scott Olson/Getty Images)



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.

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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.’ “

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 appears in the March 28, 2015 edition of National Journal Magazine as Broken City.

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