CHICAGO – Illinois Gov. Bruce Rauner vetoed legislation designed to save Chicago's municipal and laborers' funds from looming insolvency.
"This is another kick-the-can approach to pension funding that landed Chicago in fiscal crisis in the first place," Rauner said in announcing the veto late Friday. "This bill will create an unsustainable funding schedule that will lead to tax increases without solving the real problem."
Rauner highlighted the need for future city tax hikes and called on other state leaders and all of its communities to work together on a "more comprehensive approach to reform."
Reforms, however, are tricky to enact in Illinois. The Illinois Supreme Court shot down attempts by Chicago and the state government to change pensions, citing state constitutional protections against cuts that impair or diminish public pensions.
Chicago Mayor Rahm Emanuel quickly attacked Rauner Friday, citing the need to rescue the funds, and ratings recognition that followed even though analysts consider the fixes flawed.
"The governor continues to make one irresponsible and irrational decision after another, and his veto today is the latest example," Emanuel said in a statement. "Instead of helping secure the future of our taxpayers and middle-class retirees, the governor chose to hold them hostage - just as he has done to social service providers, schoolchildren and universities across the state."
Chicago posted a notice late Friday of an investor "update" call set for Monday morning at 9:00 a.m. Chief financial officer Carole Brown will provide an update and then take questions.
Senate Bill 2437 passed the House in December on a 91-16 vote on the final day of the legislature's annual fall veto session. After intense lobbying to generate bipartisan support, Democrats were joined by some Republicans. The Senate then signed off in a 41-0 vote in early January during the lame-duck session.
The deadline for action by Rauner was March 25. If he took no action, the bill would have become law. The bill is now dead because it was passed by a prior legislature, even though it was passed by veto-proof majorities. The new General Assembly elected in November was sworn in early this year.
The veto was expected given the political dispute between Rauner and the Democratic legislative majorities that has driven the almost 21-month-long state budget impasse.
The governor has also feuded with Emanuel. Rauner had offered to support the bill but only if Emanuel used his political muscle with legislative Democrats. Emanuel instead has attacked the governor for holding a budget solution hostage to Rauner's larger policy agenda.
In anticipation of a possible veto, the new Senate approved Senate Bill 14, identical to the bill Rauner vetoed, in a 38-to-11 vote Jan. 25. It is pending before the House.
While the prior bill received strong bipartisan support it's unclear whether Republicans will remain on board given the acrimony over the budget impasse. Democrats enjoy a veto-proof three-fifths majority in the Senate but their House majority falls short.
"The Senate feared this would happen. That's why we went ahead and passed the same plan early this session, once again with bipartisan support. Hopefully the governor will get another chance to reconsider his opposition," John Patterson, a spokesman for Senate President John Cullerton, D-Chicago, said in a statement.
The legislation would enact funding scheme changes for Chicago's municipal employees' and laborers' pension funds designed to stave off the insolvency expected under the current statutory contribution formula. It would put the funds on a path to a 90% funded ratio in 2057, city officials say.
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.
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 would allow 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.
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 would cover any fees.
Rauner vetoed the city's overhaul of the city's public safety reforms last year but an override succeeded with the help of some House Republicans.
Enactment of the state law would mark the final step in putting the city's pension fixes in place.
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.
Critics attacked the plan for those two shortcomings. A record $543 million annual 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 to those funds 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.