Chicago Council Gives Final Approval to Pension Tax

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CHICAGO – The Chicago City Council signed off Wednesday on a new water/sewer tax to help rescue the city's largest pension fund from looming insolvency, as well as up to $3.5 billion of O'Hare International Airport borrowing.

Both issues faced some council opposition but few council members rose to debate the measures as they did during Finance Committee meetings last week.

The bond ordinances passed 26-21 with three abstentions due to conflicts of interest. The tally marked one of the closer votes seen by Mayor Rahm Emanuel on bond authorizations, which typically sail through council approval. The closer-than-normal vote was primarily due to aldermen's anger over minority participation in Aviation Department contracts and staffing levels.

The new tax that will phase in a 29% hike in water and sewer rates by imposing a tax on water usage cleared in a 40-10 vote with all council members voting.

Emanuel thanked council members for passing the revenue generator in what he called a difficult political vote taken on top of other tax hikes to funnel more revenue to the city's troubled pension system.

"The actions here while politically important and politically courageous may not be popular, but we did say we were going to do the hard things and the necessary things to finally fix Chicago's fiscal picture," Emanuel told them after the vote. "Your collective willingness to finally step up and deal with this changed the financial picture of the city of Chicago."

Emanuel said without action on the pension funds, "Chicago's finances would have been insolvent," and he highlighted Fitch Ratings' recent action revising the city's outlook to stable from negative in large part due to "material" increase proposed for the municipal fund.

Fitch rates the city at the lowest investment grade level of BBB-minus. The city's general obligation bonds are rated Ba1 by Moody's Investors Service and BBB-plus by Kroll Bond Rating Agency and S&P Global Ratings. The agencies other than Fitch assign a negative outlook.

The city's plan establishes a funding schedule that puts the municipal fund on track to reach an actuarially required contribution in 2022. The plan calls for the city to pour $2 billion more into the fund over the next six years than the current $1 billion it owes under the existing statutorily based funding formula in which city contributions are based on a percentage of what employees contribute.

But after 2022, the city's proposed funding scheme will fall more than $250 million short of what's needed to meet payment requirements.

Emanuel's finance team defended the proposed tax and funding scheme during the committee hearing as the best balance of the needs of the fund with the burden on taxpayers but acknowledged that additional revenue will be needed for all four city pension funds down the road.

Emanuel acknowledged as much after the council meeting but defended his plan against its critics, stressing that all four of the city's pension funds now have a new stable revenue source.

"There's a cost to doing nothing," he said.

Alderman Edward Burke, chairman of the Finance Committee and the sole alderman to speak on the new tax, called it the best option to shore up the municipal fund after the council late last year agreed to phase in record $543 million property tax hike to shore up the city's police and firefighters funds. The tax levy also faces a big hike this year in the Chicago Public Schools levy. A communications tax is providing additional fund for the smaller laborers' pension fund.

The new tax "makes the most sense" as the city "simply cannot saddle Chicago residents with another property tax increase," Burke said.

Burke acknowledged criticisms that the city's new funding schedule, while staving off insolvency, falls short of fully solving the fund's revenue woes, saying it's not the "panacea" that will cure the city's pension deficits but it "will go towards achieving financial stability and head off a financial disaster which is only nine years down the road."

Under the funding plan, Chicago would budget in 2017 for a $267 million contribution to be made in 2018. It ramps up to $344 million in budget year 2018, $422 million in 2019, $499 million in 2020, and $577 million in 2021. The next year it makes the leap to what the city said will be an ARC level of $879 million.

The following year the payment would rise to $898 million and the city will need to cover a more than $250 million gap in revenues. The ARC payments continue to grow, but at a slow pace, hitting the $1 billion mark in budget year 2029. Payments reach nearly $2 billion at the end of the 2057 schedule. The funded ratio would remain below 50% until 2050 when it is to begin building to reach 90% in 2057.

The city still needs state legislative approval, which it will seek in the fall. Current employees and retirees wouldn't see any benefit change so as not to run afoul of state court rulings that have found cuts unconstitutional.

The municipal fund has $9.8 billion of unfunded liabilities and $18.6 billion of net pension liabilities under new accounting rules. The city's total net pension liabilities are $33.8 billion.

The O'Hare financings are planned for the third and fourth quarters. Bank of America Merrill Lynch will be the senior manager on up to $1.5 billion of general airport revenue bond refundings with 12.5% of net present value savings expected.

Morgan Stanley is senior manager on up to $1.5 billion of new money GARBs with about $1.3 billion of the proceeds funding airfield projects including construction of the final runway in the O'Hare Modernization Program with $150 million covering design and other costs.

Loop Capital Markets, a majority African American-owned firm, will lead up to $500 million of passenger facility charge-backed issuance that includes $350 million of new money to help cover renovations and expansion projects at Terminal 5 and $80 million to refund 2010, 2011, and 2012 bonds with 7.5% net present value savings.

Fitch Ratings in May upgraded O'Hare's $6.4 billion of senior lien general airport revenue bonds rating to A from A-minus. About $600 million of passenger facility charge revenue bonds were affirmed at A. The outlook on both is stable.

O'Hare's senior-lien bonds are rated A2 by Moody's, A by S&P Global Services and A-plus by the Kroll Bond Rating Agency. The PFC bonds carry the same Moody's and S&P ratings and are not rated by Kroll.

The closer than normal vote was due to frustration among members of the Black Caucus and the Progressive Caucus over the Aviation Department's failure to adequately improve minority numbers among its staff and on the contracts it awards.

Staff diversity levels at the banking and legal firms assigned to the bond deals didn't help. The two caucuses joined together last Friday to force a delay in the vote on the bonds. They were later approved Monday.

The black caucus met with Aviation Commissioner Ginger Evans last week and future meetings are expected to review whether the department makes strides but council member Pat Dowell, one of the 21 votes against the bonds issues, said she wants results.

Dowell called the diversity among Aviation contracts "appalling, alarming, and disturbing." She added that the "the firms that seek to do bond business with the city are also lacking in diversity."

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