CHICAGO – With Illinois’ statewide election fast approaching in November and Chicago right behind in February, candidates have offered few specifics about how they would tackle the pension strains that have dragged down city and state bond ratings and hold a vise grip on future spending.
“The major candidates -- they are not talking about the pension crisis but it looms enormously on the horizon" for the state and Chicago, Chicago Civic Federation President Laurence Msall said Sept. 13 during a panel discussion at the University of Illinois at Chicago’s Urban Forum conference on pensions, debt, and government services.
“I haven’t heard anyone basically identify this shared pain that will be necessary to stabilize the state or city’s finances going forward,” Msall added in an interview. “The question is are we going to elect people who are going to address the problem."
Gov. Bruce Rauner, a Republican who is seeking a second term, faces J.B. Pritzker, a Democrat, in the Nov. 6 contest.
Chicago Mayor Rahm Emanuel rocked the local political landscape earlier this month when he announced he would not seek a third term.
Chicago with a collective pension funded ratio of 26.5% and Illinois with a collective funded ratio of 39.9% are far behind their peers, Chris Morrill, executive director of the Government Finance Officers Association, said during the panel discussion with Msall. He said the national aggregate ratio on public pensions has held steady at just over 70% in recent years.
Chicago and the state should aim for measures that represent “best practices” by taking a long view with the payoff down the road because pushing off the pain just adds to the strains, Morrill said.
Future action taken by the city and state stands to impact future ratings, Msall added. Both are tarnished – Illinois carries the distinction of being the lowest rated state in the nation with two ratings at the final notch above junk and Chicago has one junk level rating.
Illinois is saddled with a $129 billion unfunded tab and Chicago with $28 billion in net pension liabilities. An Illinois Department of Insurance report on fiscal 2016 pension data put the total statewide tab at $185.2 billion for a collective funded ratio of 47.9%.
“Any solution is going to require sacrifice by all involved parties,” Msall said. The Civic Federation has recommended fund consolidation and pursuing a constitutional amendment that would ease strict constitutional restrictions that bar any benefit cuts.
Such a change could allow for the state to modify benefits, including lowering the 3% automatic cost-of-living increases some retirees enjoy. Union lawyers say they would challenge any attempt to cut benefits promised to retirees or long-time employees.
Illinois pension contributions consume more than 20% of its general fund and are on the rise while Chicago has raised property taxes, imposed a water/sewer surcharge, and raised the emergency 9-1-1 call fee to cover rising contributions.
ILLINOIS
Pritzker called the pension crisis a “high priority." He believes a statewide fix is needed but has offered few specifics.
“This challenge exists for Chicago and … for municipalities and counties across the state so it’s not isolated,” Pritzker said during a
“I’ve been very clear about ideas” about how to deal with pensions and fund critical services, he said. “We are talking about revenue, we are talking about efficiencies in government.”
Pritzker said during a NBC5 Chicago debate with Rauner and the two other longshots in the race – Libertarian candidate Kash Jackson and Conservative candidate Sam McCann – he supports funneling more money upfront to the state’s pension system and then re-amortizing the 1995 funding schedule now in place.
He has not said how the state would come up with the cash needed to raise funding.
During the debate, Rauner reiterated his support for the Democratic Senate President’s proposed “consideration” model that asks employees to accept some cuts in exchange for upfront perks and the continued counting of pay raises toward pensionable salaries.
It could shave about $1 billion off the state’s $7 billion to $8 billion annual pension contribution but unions have vowed a constitutional fight. Rauner has previously proposed that the savings from the reforms should go to roll back a portion of the 2017 income tax hike.
Rauner acknowledged that any pension reforms face a challenge but the state should move forward. "Let's see what the judges rule," Rauner said in an editorial board meeting with Crain's Chicago Business. He also is skeptical of the legality of changing benefits for existing employees under a constitutional amendment that modifies benefits and suggested benefits should be honored. "You don't retroactively take them away," he said.
On new revenue, Rauner said he opposes legalized marijuana calling it a "human experiment" with "major negative consequences" but supports expanding gambling. "We are losing massive amounts of Illinois revenue to Indiana and Wisconsin and other states," he said. "That can generate some significant new revenue."
Pritzker supports shifting from a flat income tax rate to a graduated system that would require higher earners to pay more.
Rauner is a staunch critic of such a move and counters it would end up costing the middle class more and would come on top of the hike – to a 4.95% rate from 3.75% -- approved over his objections in 2017.
Because moving away from a flat tax rate would require a voter-approved constitutional amendment, Pritzker has said he would seek an “artificial” graduated tax by raising the overall rate while increasing various tax credits and exemptions that benefit people with lower incomes and the middle class. Pritzker refused during the debate to be pinned down on prospective rates saying they would be negotiated with lawmakers.
Pritzker has also endorsed “refinancing” the state’s overdue bill backlog that currently stands at $8 billion but has not provided details on what form the refinancing would take. He has endorsed legalizing marijuana and has said legalizing sports betting provides another potential revenue option.
During the debate, both Rauner and Pritzker said they oppose other new revenue sources that are widely used by other states such as taxing some retirement income and extending the sales tax to some services.
In a recent speech reflecting on his tumultuous first term and goals for a second, Rauner acknowledged the painful impact of the two-year budget impasse that was driven by political differences with Democrats.
“The disruption, the arguments, the negotiations of the past four years have laid the groundwork for real and necessary change. We can build on the bipartisan successes to move our state forward,” Rauner said. “The pillars of this work remain the same: reducing taxes, growing jobs, and ending corruption in state government.”
All House seats are up for election in November, along with one-third of Senate seats. Democrats currently hold a three-fifths supermajority in the Senate and a simple majority in the House.
CHICAGO
At least 17 candidates have formally announced their run for the mayor’s seat, including a handful of higher-profile candidates that jumped in after Emanuel said he wouldn't seek a third term. If no one candidate wins a majority in February, an April run-off is held.
Recent entrants include Cook County Board President Toni Preckwinkle, former Chicago Board of Education chairman Gery Chico, and former banker Bill Daley, the brother of former Mayor Richard M. Daley, who was Commerce secretary under Bill Clinton and chief of staff to President Obama.
A handful of others including state Comptroller Susana Mendoza, city Treasurer Kurt Summers and Cook County Commissioner Jesus “Chuy” Garcia, who ran against Emanuel four years ago, are eyeing a run.
Few have offered a fiscal roadmap for the city or said whether they support new revenue streams from business, such as a financial transaction tax or expanded gambling. Any profits from a new Chicago casino would go to public safety pensions. Bill Daley has said in recent interviews he would seek state help under a potential Pritzker administration and that the pain must be shared, a theme many have used without offering specifics.
How much revenue the next mayor must come up with quickly is not yet known. Emanuel’s administration has yet to identify how the city will fully cover looming spikes in actuarial funding requirements for pensions. The city will see a $170 million and $110 million respective increase in 2021 for police and fire funds and a $277 million and $33 million respective jump for municipal and laborers’ funds in 2023.
Chicago continues to explore a possible $10 billion pension bond issue that would ease the spike, but its prospects dimmed after Emanuel’s announcement because investors are more uncertain over the city’s future fiscal direction and market rates continue to rise, which reduces any benefit from a pension borrowing. If it proceeds, the administration has warned new revenue would still be needed.
The Civic Federation is withholding judgment on the pension bond until a formal proposal is laid out, but Msall suggested he’s skeptical given the interest rate risks. The group wants the city to lay out a broad plan that addresses the pension woes of sister agencies as all depend on the same tax base.
“Potentially adding more debt to an already highly leveraged city or state better fix the problem as part of a comprehensive solution rather than buy some more time,” Msall said. Chicago’s chief financial officer, Carole Brown, told The Bond Buyer in a recent interview if the city moves forward it’s likely to be with a standalone financing plan.
