Chicago Strikes Deal With Union That Includes Pension Reforms

CHICAGO — Chicago has struck a tentative collective bargaining agreement with one of its smaller unions that includes pension benefit and retiree health care reforms that Mayor Rahm Emanuel characterized Tuesday as a possible roadmap to help solve the city’s pension crisis.

The terms must win approval by the union’s rank and file – which is not a certainty – along with the City Council. Many of the pension reforms including a change in the existing funding structure that eases a looming spike in payments must win Illinois General Assembly approval.

Emanuel and Chicago Police Sergeants Association president James Ade touted the benefits of the four-year deal as fair to members and taxpayers. “Today, their leadership protects our future by ensuring the retirement of their members while helping to set our city onto a path of long-term financial security,” the mayor said.

Chicago carries $16.7 billion of unfunded pension liabilities across its four funds and faces a $600 million increase in its annual payments for its police and firefighters funds in 2015 under a state legislative mandate. The city has a budget of about $6.5 billion so Emanuel has warned that the increase would drive a massive property-tax hike and-or deep cuts.

The cost of the package, which awards a 9% pay hike phased in over the four-year term of the contract, was not made available nor was the potential savings of the pension and retiree health care changes.

The proposed pact raises the retirement age to 53 from 50 and enables members to raise their final annuity to 80% from 75% under certain conditions. Members retain their eligibility for subsidized retiree health care at 55 but future retirees must contribute 2% of their retiree annuity to defray city costs. The current benefit continues unchanged for retirees.

The pact calls for an increase in the 9% pension contribution rate currently paid by members by 3%, in annual installments over the next three years. The 12% rate would drop to 10% when the fund reaches an 80% funded ratio. The pact applies to current employees and retirees.

Retirees who receive a current cost-of-living annual adjustment of 3% would see a drop to 2.5% and the rate would be frozen in 2014, 2016 and 2018. The rate will then be set at 2.5%, non-compounded.

Future retirees who are set under current law to receive a 1.5 % non-compounded cost of living adjustment would see their COLA suspended in every other year beginning in 2014, but would receive 2.5 % during non-suspended years until the pension fund reaches a 60% funded ratio. At that level, the COLA would then be suspended every third year. A 2.5 % non-compounded COLA would apply in intervening years. At 80% funded, the COLA suspension would end and the rate would rise to 3%.

The city’s police fund is 35.6% funded, the firefighters fund is 28.3% funded, the laborers fund is 64.9% funded, and the municipal fund is 44.6% funded.

In addition to stabilizing pensions over the long term, the agreement buys the city some time on a looming hike in payments due in 2015 as Chicago shifts from a payment formula to one that is actuarially based for its police and firefighters unions. The law requires the city to make payments that put the funds on a path to a 90% funded ratio by 2040.

The tentative pact with the sergeants — which would have just a minor impact on the funding increase because of the small number of members — would shift the funding structure so that payments would rise gradually over seven years. At that time, the city would meet the actuarially required contribution and adhere to a payment scheme to reach a 90 % funded ratio by 2055.

The city heralded the pension reforms as a critical first step and baseline framework for fixing the city’s pension crisis. The sergeants union is one of Chicago’s smaller ones, however, with less than 1,200, compared to the Fraternal Order of Police, which has 17,000 members and was critical of the agreement in published reports.

Emanuel last year floated a series of pension reforms with the General Assembly but they fell by the wayside as lawmakers debated state-level reforms aimed at addressing $95 billion of unfunded obligations.

By reaching agreement with the city, the union avoids having to make potentially tougher concessions without their input. The city benefits by potentially avoiding a legal battle waged by the union given the strong protections afforded pension benefits by the state constitution. The pact, however, does not preclude a retiree challenge.

“By working in partnership with the city administration we were able to maintain our members’ benefits and ensure their pensions for the future,” Ade said.

A long-awaited review of the Chicago’s retiree health care system last month concluded that the cash-strapped city can’t afford to keep subsidizing its other post-employment benefits at existing levels.

Chicago covers its retiree health care costs on a pay-as-you-go basis with the annual cost now at about $108 million. The city’s accrued unfunded other post-employment benefits obligation at the end of 2011 was just $254 million, but that assumes that the bulk of the city’s obligations end with the June 30 expiration of a legal settlement agreement. Changes could prompt additional litigation, so the city must tread cautiously in cutting benefits. Full continuation of the existing plan would result in a $2.1 billion accrued unfunded liability.

Moody’s Investors Service revised its outlook to negative on Chicago’s $8 billion of Aa3-rated GO debt last year. Fitch Ratings last year affirmed the city’s equivalent AA-minus rating and Standard & Poor’s affirmed its A-plus rating. Both assign stable outlooks.

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