Chicago's Partial Pension Overhaul Passes Legislature

CHICAGO - The Illinois General Assembly Tuesday approved legislation overhauling two of Chicago's four troubled pension funds after Mayor Rahm Emanuel bowed to critics' concerns and yanked language that mandated property tax hikes.

The bill now heads to Gov. Pat Quinn's desk. Quinn earlier in the day refused to say whether he would sign the amended version, stripped of the property tax mandate.

The fix would put the funds - now on track toward insolvency as soon as the coming decade -- on course to reach a 90% funded ratio by 2055. It does not address the city's also underfunded fire and police funds. Collectively, the city is saddled with $19.5 billion of unfunded obligations, a burden that has battered its credit rating.

The House approved the package first in a 73-41 vote with one member voting present. The vote included 23 minority Republicans including the minority leader. The Senate passed the legislation in a 31-23 vote with two voting present and was opposed by the minority Republican leadership.

The legislation "significantly" reforms the city's municipal and laborers' funds to "achieve long-term financial stability," the legislation's House sponsor, Speaker Michael Madigan, D-Chicago, told members ahead of the vote.

"The legislation does not mandate a property tax increase ….it will solely be up to the Chicago City Council to determine how they will fund the increased contributions," Madigan said.

Madigan outlined changes in the new version and took questions, some of which he couldn't answer, such as how the city intends to fully cover its higher contributions. He was could not answer how the city intended to address its police and fire fund woes, and a looming $600 million spike in contributions due next year under a prior state mandate.

Madigan said Emanuel has indicated to him in conversation that he intends to also submit separately a solution for the police and fire funds and also for the Chicago Public Schools' teachers' fund that's in need of a legislative fix.

The revisions were submitted as amendment 6 to Senate Bill 1922 late Monday by Madigan, putting the bill back on course for quick consideration.

Emanuel's administration unveiled the plan to raise city and employee contributions and cut some benefits including cost-of-living adjustments early last week and legislation was introduced mid-week. The bill sputtered as Republicans and some city Democrats refused to approve legislation with built-in property tax hikes designed to raise $750 million for city contributions over the next five years.

Gov. Pat Quinn sealed the mandate's fate late Monday when he suggested it would "gouge" taxpayers and he opposed it. Madigan soon filed the revisions which dropped the property tax mandate and addressed some other concerns raised by lawmakers.

During House debate, Republican Minority Leader Jim Durkin said he supported the bill, calling Chicago the state's economic engine and said he didn't want to see Chicago go the way of Detroit. "They certainly are in a financial crisis…. the position they are in is very fragile," Durkin said. "I think it's an important bill to pass."

Most of the House members who cast votes against the plan did not speak during debate. One that did, Rep. David McSweeney, R-Cary, charged that higher property taxes are still in store for city homeowners despite the mandate's removal.

"Let's not kid anybody," McSweeney said. "What we are talking about today is a massive property tax increase."

The city is expected to still rely on property tax hikes but the burden of approval will fall on the City Council's shoulders. Members face re-election next year as does Emanuel.

In the later Senate debate, Republican minority leaders questioned the rush to vote and demanded more information on how the city planned to cover its increased contributions and how it would deal with its public safety funds.

"What's the plan….the place is on fire up there….we want to know what the plan is," said state Sen. Matt Murphy, R-Palatine.

Senate Republican Minority Leader Christine Radogno, R-Lemont, echoed Murphy. "It's irresponsible on our part to rush in and take action when we don't have the full picture."

Democratic backers stressed the urgency of the situation as evidenced in the city's rating downgrades. They dismissed the notion that they were taking a piecemeal approach by not demanding a sweeping package to fix all of the city and teachers' funds.

"I'd like to suggest it would irresponsible of us not to act," said the bill's Senate sponsor, Sen. Kwame Raoul, D-Chicago.

Senate President John Cullerton, D-Chicago, said it deserved to pass even though he has concerns over its constitutionality. "We have to pass a bill to get it to the court," he said.

Cullerton and other backers said the city's agreement with a majority of unions impacted also offered another reason to support it. The majority of unions have agreed to remain "neutral" on the bill and several have openly said it should pass.

A few unions remain deeply opposed and urged Quinn to veto it. If he signs the legislation, they are likely to file litigation arguing the changes violate state constitutional provisions protecting pensions from being impaired.

Originally, the legislation would have imposed a special pension stabilization levy that would have raised a total of $750 million over those five years. The city would have been required to fund at least 50% of its increased contributions through the property tax levy hike. The city would tap several enterprise funds and budgetary savings to cover the remainder.

Under the new version, the city may fund pensions through its traditional, existing levy or through other revenue sources as allowed under current law, without any additional state mandate.

"The city's required annual contribution to the fund may be paid with any available funds and shall be paid by the city to the city treasurer," it reads.

The amended version strengthens a provision allowing the state to withhold city aid, a move designed to ease unions' concerns because they had pushed for the property tax mandate as a stable source of revenue. The legislation still includes a provision that gives unions the right to sue should the city fall short of its required contribution levels.

The amended version also eases the impact of the cost-of-living adjustment cuts on low-income retirees, a change designed to address concerns raised by members of the city's African American caucus.

The overhaul is considered a good step, but would have only a mild impact on the city's massive unfunded obligations in the early years, Moody's Investor Service on Monday cautioned in a special commentary Monday.

"Even with reform, pensions will continue to weigh heavily on Chicago's credit quality," analysts wrote.

Moody's hit the city with a three-notch downgrade last year largely over the size of its unfunded obligations. In March, Moody's dropped the city to Baa1 and assigned a negative outlook. When Moody's applies its adjusted net pension liability calculation to the city's position, the liability rises to $32 billion, a figure eight times the city's 2012 operating revenues and the highest among local governments rated by Moody's.

The laborers and municipal funds account for $13.8 billion of Moody's ANPL while the city's fire and police funds account for $18.2 billion.

Fitch Ratings assigns its A-minus rating to the city's GOs and a negative outlook and Standard & Poor's assigns its A-plus rating and negative outlook.

The Municipal Employees' Annuity and Benefit Fund and Laborers' Annuity and Benefit Fund are funded at 37.2% and 55.4%, respectively.

Emanuel issued a statement after the votes, saying: "Today is an important day for Chicago residents and our city's future. We are stepping up and taking on our toughest challenges — many of which have been decades in the making. We have shown that we will not let politics stand in the way of progress as we build a stronger Chicago. For the sake of our city, we asked a lot of our residents, our employees and our retirees to accept change -- and that's never easy. I believe that the certainty we are now providing will make the change worth it."

Emanuel also thanked the General Assembly's leaders and legislation's supporters.

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