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Chicago Pension Plan Clears Key Hurdle

CHICAGO – Chicago Mayor Rahm Emanuel scored a major legislative victory with the state House's overwhelming bipartisan approval of legislation designed to stave off looming insolvency for two of the city's pension funds with a big infusion of city taxpayer dollars.

The House approved the measure in a 91-16 vote Thursday, the final day of the legislature's annual fall veto session. After intense lobbying in an effort to build up a vote big enough to overcome a potential veto by Gov. Bruce Rauner, Democrats were joined by some Republicans in supporting Senate Bill 2437.

"We are now one step closer to passing pension legislation that secures the retirements of city employees and retirees, while also protecting Chicago taxpayers," Emanuel said in a statement.

While Republican votes could shift should they be called on to override a veto, the bill enjoyed widespread support. An override would require 71 votes and Democrats currently just meet that threshold but will lose it when the new legislature opens next year.

"The city is asking for regulatory changes ….to stabilize the two pension funds," said the bill's sponsor Rep. Barbara Flynn Currie, D-Chicago. "This is certainly an improvement over what we have today."

Currie highlighted that the state is not on any financial hook for the legislation and that it's Chicago taxpayers who will fund higher payments. While it will cost Chicago more, it's money that will "be well spent" to save the funds which are "on the brink of failure," she said. It was unclear whether the Senate would act before the session closed Thursday or be called back later in the month.

The legislation puts into statutory form funding scheme changes for the municipal employees' and laborers' pension funds designed to stave off the insolvency expected under the current statutory contribution formula. It puts the funds on a path to a 90% funded ratio in 2057.

After a five-year ramp of increasing city contributions, the city commits to making an actuarially based contribution. The current formula, which has allowed the funds' health to falter, is based on a multiplier tied to recent employee contributions.

The legislation allows the state comptroller to withhold city grants should its payments fall short of required levels and it establishes a new tier of benefits and higher contributions for incoming employees.

The contribution schedule closely mirrors one previously approved by lawmakers for the city's other two funds, which cover police and firefighters. The city's combined $33.8 billion of net pension liabilities have dragged its ratings down.

House approval came after city officials and backers of the bill scurried over the last two days to curb opposition from the municipal fund and then from one union in order to build bipartisan support.

First, the backers amended the bill's language dropping a provision that would have subordinated pension contributions to bond repayment in the event the city and funds landed in court.

The deleted language was included in a provision giving the courts leeway in ordering the city to make the required payments. It allows the court to order a "reasonable payment schedule to enable the city to make the required without significantly imperiling the public health, safety, or welfare."

The deleted language said "any payments required to be made by the city … are expressly subordinated to the payment of the principal, interest, premium, if any, and other payments on or related to any bonded debt obligations of the city outstanding or to be issued, for which the source of repayment or security thereon is derived directly or indirectly from any funds collected or received by the city or collected or received by the city."

One legal source said he believed "the language was trying to comply with the reality" of the rights that bondholders enjoy if their bonds carry either a revenue pledge or an ad valorem tax pledge.

Investors favored the clause as a sign of the city's commitment to meet its obligations and the city believed it could potentially keep its punishing yield penalties down.

With the municipal fund's support in place, the city then faced opposition from a key union over a dispute as to whether city actuaries or fund actuaries should determine whether the value of new employees' benefits upon retirement are worth their proposed 11.5% contribution.

The legislation establishes a third tier for new employees and caps contributions at either 11.5% or the "normal costs" of their benefits. The two sides compromised adding language that says the normal costs "shall be calculated by an independent enrolled actuary mutually agreed upon by the fund and city." The city will cover any fees.

While a vote still looms in the Senate, the legislation faces an easier path there should an override vote be necessary because Democrats easily hold a three-fifths super majority. In the House, the majority is razor thin and all Democrats can't be counted on.

Rauner vetoed the city's overhaul of the city's public safety reforms earlier this year but an override succeeded with the help of House Republicans.

Enactment of the state law would mark the final step in putting the city's pension fixes in place. Emanuel won City Council approval for a new water-sewer tax to fund higher contributions to the municipal fund. An emergency phone surcharge is in place to cover higher payments to the laborers' fund.

The plan calls for the city to pour $2 billion more into the funds over the next six years than the current $1 billion it owes under the existing statutorily based funding formula. But after 2022, the city's proposed funding scheme will fall short of what's needed and improved funded ratios will take decades to achieve.

Both are shortfalls attacked by critics. A record $543 million property tax increase approved last year is funding higher contributions to the police and fire funds but the city will also need a new revenue source once actuarially based payments kick in.

Fitch Ratings rates the city at the lowest investment grade level of BBB-minus. The city's general obligation bonds are rated at the junk level of Ba1 by Moody's Investors Service and at BBB-plus by both Kroll Bond Rating Agency and S&P Global Ratings. Fitch and S&P revised the city's outlook to stable from negative after passage of the water/sewer tax.

Several Republicans questioned why the city couldn't act on its own. Currie countered that the city's contributions are set in state statute. Other critics called for the reform plan to be part of a larger package that could bring relief to local governments across the state.

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