Chicago recently announced it is in the process of opening a new casino with the intent to use its revenue to pay down significant unfunded liabilities in the city’s public safety pension plan. According to estimates in the recommendation report by Chicago Mayor Lori Lightfoot’s office, the casino will cost around $1.7 billion to build and generate roughly $200 million per year.
But even under the proposal’s optimistic outlook, the casino’s annual revenue is only a fraction of the annual required contributions to the city’s police and fire pension fund. Due to the gargantuan amount of unfunded liabilities the city already owes, this move is unlikely to mitigate future tax hikes, and a significant effort to fulfill the pension promises made to workers still lies ahead.
For context, Chicago’s police and fire pension fund is about $12.5 billion underfunded. Those unfunded liabilities are expected to grow even bigger this year due to the poor investment returns generated in 2022. The estimated $200 million in annual revenue from the casino is only 9% of the $2.3 billion contribution the city must make yearly to avoid further falling behind in debt. Mayor Lightfoot’s most recent budget does allocate $2 million in extra funds to police and fire, some of which will go to paying down pension debt. Yet even with this and the casino revenue, it is still not enough.
While this is the first time a city is taking this particular approach to filling a public pension funding gap, using gambling revenue to plug a pension hole is an extension of a more common practice among underfunded government pension systems—selling lottery tickets. This type of revenue stream is historically unreliable, seeing as lottery revenues dropped heavily during the COVID-19 pandemic, with people staying home and ordering groceries online (most people buy lottery tickets at grocery stores). While the pandemic was an outlier event, lottery revenues have fluctuated a decent amount from year to year.
The use of novel sources of revenue is not new for Chicago, and unfortunately, other methods policymakers have attempted have been less free-market oriented. In 2003, Chicago introduced red-light cameras as a way to curb traffic accidents, but this later became a crucial revenue source for the city, so much so that, at one point, Chicago lowered yellow-light intervals to catch more people and generate more through fines. Chicago has also tried many unique taxes to gin up revenue, such as a Netflix tax, a soda tax, and, perhaps most controversially, a commuter tax. The commuter tax was intended to tax city government workers who worked in the city but lived in the outlying suburbs, implying they were “freeloading.”
While there are ethical differences between generating revenue from something like a red-light camera vs. a casino, these tax and revenue plans all highlight that Chicago is using desperate tactics in hopes of generating revenue to pay for decades of budgetary mismanagement.
The truth is that the casino revenue will barely make a dent in Chicago’s pension funding shortfalls. The city needs to make substantive pension reforms rather than look for these stopgap measures. Even should the casino succeed, Chicago still needs to raise its contributions, whether through a larger portion of the city’s budget or some shared sacrifice between city employees receiving the pensions and taxpayers. When it comes to retirement benefits, policymakers need to consider alternative plan designs for new employees that do not risk piling unexpected costs on the city’s taxpayers.
Pension reforms will likely be an uphill battle for Chicago, considering legal restrictions set at the state level. The Illinois Supreme Court has struck down public pension reform efforts, such as cost-of-living adjustments and salary caps for benefit payments, as unconstitutional. Despite formidable legal obstacles, these are the types of public pension reforms that Chicago needs to address the source of its hemorrhaging pension debt.
Pursuing inadequate solutions with highly politicized taxes or through a brand-new casino is a futile way to dodge the city’s public pension debt and fiscal challenges head-on.
Stay in Touch with Our Pension Experts
Reason Foundation’s Pension Integrity Project has helped policymakers in states like Arizona, Colorado, Michigan, and Montana implement substantive pension reforms. Our monthly newsletter highlights the latest actuarial analysis and policy insights from our team.