Statecraft Should the Feds Bail Out Chicago?
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Nov 25, 2025 David Schleicher, a Yale Law School professor and expert in local government finance, joins to tackle the pressing issues surrounding municipal pensions and potential bailouts. He discusses why many pension funds are struggling, using Chicago's unique situation as a focal point. The conversation dives into the morality of bailouts, the hidden debt tactics cities employ, and how pension crises impact public services. Schleicher also proposes what a federal response could look like, blending bailouts with necessary reforms to avoid moral hazard.
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Pensions As Hidden Long-Term Debt
- Pension underfunding functions like hidden debt because legal promises to retirees are often not pre-funded.
- Underfunding squeezes current budgets and crowds out present services and investments.
Legal Protections Lock In Future Costs
- Many states legally protect pension benefits, creating the California Rule that freezes pension terms for current workers.
- That legal protection turns short-term political choices into long-run fiscal obligations.
Accounting Assumptions Mask Risk
- Governments hide pension shortfalls by assuming optimistic investment returns in accounting.
- Economically, legally guaranteed payments should be discounted at safe rates, not risky expected returns.
