Chicago Negotiating on $550 Million Pension Spike

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Rahm Emanuel, mayor of Chicago, listens during an interview inside the Bloomberg Link during day two of the Democratic National Convention (DNC) in Charlotte, North Carolina, U.S., on Wednesday, Sept. 5, 2012. Democratic officials have moved President Barack Obama's nomination acceptance speech tomorrow night to the Time Warner Cable Arena from the larger, outdoor Bank of America Stadium because of the possibility of severe weather. Photographer: David Paul Morris/Bloomberg *** Local Caption *** Rahm Emanuel

CHICAGO - Chicago is trying to strike an agreement with its police and fire unions on changes to their pension funding formulas, the city reported in newly published bond offering statements.

The city wants changes to the 2010 state law that will require it next year to begin contributing to the public safety funds on an actuarial basis, which will require a $550 million annual contribution increase.

The negotiations, the city said in the offering statements, could "materially impact" required pension contributions, providing relief from a $550 million hike due next year.

State action would be needed on any agreement reached.

Chicago Mayor Rahm Emanuel has never outlined a plan to tackle the higher contributions, saying he will wait until the current state legislative session ends this month in the hope of obtaining some relief there.

The amendments being sought include an extension of the amortization period that requires the city reach a 90% funded ratio by 2040, and the ability to phase in the shift to an actuarially based contribution level. The current contribution schedule, which has left the pensions underfunded, is based on a statutory formula tied to employee contributions.

Next year's scheduled contribution spike, under a state law that impacts all local government public safety pension funds, weighs heavily on the city's rocky fiscal situation.

The city's collective $20 billion of pension obligations have driven its steep credit rating dive over the last two years.

Moody's Investors Service cited concerns over the impact on city pension reform efforts, including the legality of changes already enacted to its municipal and laborers' funds, from the Illinois Supreme Court's voiding of state benefit cuts, when it dropped Chicago to the junk level rating of Ba1 on May 12.

The city must tread cautiously because delays in stabilizing the police and fire funds and a failure to come up with new revenues have been cited as potential downgrade triggers.

"The General Assembly may also consider other proposed legislation that could affect the city payment obligations …. and/or funding sources for those obligations, including a city-owned casino," the offering statements say. "The city makes no representation whether or when any such legislation would be enacted."

Under the current mandate, the city public safety contribution next year increases by $550 million and is then expected to continue increasing.

The city will look to "improvements in operating efficiencies and incremental revenues" to fund its higher payments, wherever they land, after the close of the legislature's spring session, the offering documents say.

If the city is forced to cover the full contribution amount and rely solely on its property levy, the $550 million would come on top of what is now a $4.2 billion levy collected by Chicago and overlapping local governments. The revenue would be collected in two installments in the spring and fall of the following year.

The city's disclosure echoes comments made by Emanuel after a City Council meeting Wednesday in which he said revenue decisions at the city level await the close of the legislative session May 31.

"Everything I'm doing is to limit the exposure of the public in that way. I want those things to play out to see where we are and make sure we're in the best position," Emanuel said.

The Chicago Public Schools could also land on the legislature's agenda after Moody's dropped the district to junk level Ba3 over its $1.1 billion deficit, limited revenue-raising flexibility, and $9.5 billion of unfunded pension obligations.

Analysts have warned that the pressures raise questions over the district's solvency and new Gov. Bruce Rauner has warned no bailout is coming. Emanuel is pushing for the state to take over teachers' pensions. The district could seek to lift property tax caps. The offering statements on the city's $800 million conversion of floating-rate paper to fixed-rate, selling Wednesday, warn of the potential impact of the Chicago Board of Education's woes.

"The failure to resolve the current and future CPS deficits or resolving them by budget cuts and /or increases in property taxes alone, and without state assistance, could have an adverse effect on the city's economy and/or property tax base," the offering statements say.

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