CHICAGO – Chicago would raise its contributions to the its laborers' pension fund by at least 30% annually over the next five years under a new plan to stabilize the fund and steer it away from its path to insolvency.
Newer employees would also contribute more under the plan Mayor Rahm Emanuel's administration reached with unions. The plan would require state legislative approval but it would not face the same legal obstacles that doomed the city's 2014 pension reform package for both its laborers' and municipal employees' funds.
Rating agencies and investors have been pressing the city to announce an alternative plan since the state Supreme Court overturned that pension overhaul, but are unlikely to be calmed much by Monday's announcement given that a more costly fix for the much larger municipal employees' fund has not been reached.
"This agreement marks a tremendous step forward in ensuring that the city's employees and retirees have a secure retirement, while protecting Chicago's taxpayers from bearing the entire responsibility on their own," Emanuel said in a statement.
The Illinois Supreme Court voided the pension changes in March because cuts to employee and retiree benefits violated the state constitution's pension protection clause.
The new plan would stabilize – albeit slowly -- the smaller of the two funds.
The city is still in negotiations with the roughly 30 unions who represent its general municipal employees, budget director Alexandra Holt and chief financial officer Carole Brown said Monday on a call to discuss the new plan.
"Everything is on the table" with respect to potential revenue sources, Holt said. The city has already reached deep into property owners' pockets with a record property tax hike that will phase in a $543 million annual levy increase to help cover rising public safety contributions.
The city feels the laborers' agreement "offers a good framework for discussions with the municipal fund," Brown added.
The municipal and laborers' funds account for half of the city's roughly $20 billion unfunded pension tab, which has dragged its general obligation rating down into junk bond territory, with the threat looming of further deterioration absent a viable plan to solve its pension crisis.
The laborers' revenue fix comes at the expense of the municipal fund. An additional $40 million of annual revenue generated by a 2014 telephone fee surcharge enacted to help cover initial increases in city contributions to both funds under the failed overhaul will now go solely to the laborers' fund beginning with 2017 payments sent to the funds in 2018.
The city's airport and water enterprise funds face higher proportionate contributions to help cover an at least 30% annual hike in city payments during a ramp up of payments until an actuarially required contribution is reached in 2022. Payments will then rise by 3 to 5% annually.
The plan puts the funds on course to reach a 90% funded level by 2057.
Future employees hired in 2017 face a 3% increase in contributions to 11.5%, but they'd be eligible for retirement at 65, instead of 67. So-called tier two employees, about 25% of current employees who were hired after 2010 at lower benefits levels, will be offered a choice.
They can become eligible for retirement benefits two years early at 65 if they raise their contributions to 11.5% from 8.5%, or they can leave their current benefit and payment structure alone.
"It would be at the employee's discretion so we thought it would be consistent with the Illinois Supreme Court," Holt said. While outright cuts are prohibited, the court said the city could trim benefits if the reduction is offset with some perk or negotiated through collective bargaining or agreed to by individual members.
The city currently pays about $15 million from its property tax and personal property replacement tax levies annually toward the laborer's fund and $162 million to the municipal fund, payments based on a statutory formula based on a percentage of employee contributions. It falls hundreds of millions of dollars short of an actuarially required contribution annually.
Brown and Holt said the city intends to present the legislation to the General Assembly for its annual fall veto session. Gov. Bruce Rauner, a Republican, and the Democratic-controlled Legislature remain at loggerheads over a fiscal 2016 and fiscal 2017 budget with the clock ticking toward a May 31 adjournment of the current session.
The fate of Emanuel's proposed re-amortization of the city's public safety contribution schedule also hangs in the balance at the state capitol. Legislation shaving $220 million of the city's annual payment is sitting on Rauner's desk. He has threatened to veto it unless Emanuel helps persuade his fellow Democrats to agree to policy and governance reforms.
The health of the two public safety funds further eroded over the last year with another $3 billion of unfunded liabilities being dumped on to the city's pension tab, according to new 2015 actuarial reports.
Under new accounting rules, the net pension liability for the two funds that must be reported on the city's balance sheet skyrocketed by about $13 billion.
The municipal fund, which has about 70,000 members, saw its unfunded liabilities rise by $2.5 billion, and is headed toward insolvency in 2025. The unfunded liabilities grew to $9.8 billion in 2015 from $7.3 billion in 2014 after falling from $8.7 billion in 2013. The funded ratio fell to 32.9% from 40.9%, according to the report prepared by Segal Consulting.
The laborers' actuarial unfunded liability rose by about $500 million. It grew to $1.2 billion in 2015 from $754 million in 2014 with its funded ratio falling to 53% from 64.3%, according to the 2015 report prepared by Gabriel, Roeder, Smith & Co. The fund, which serves about 8,000 members, is on course to deplete assets in 2027.
The city's GOs are rated Ba1 by Moody's Investors Service and BBB-plus by Kroll Bond Rating Agency and S&P Global Ratings. Fitch Ratings has the city at the lowest investment grade level of BBB-minus. Both Kroll and Fitch dropped the city after the March court ruling.
