CHICAGO – Chicago Mayor Rahm Emanuel is banking on mounting political and public pressure and his own political capital to convince state lawmakers to adopt pension reforms to shore up the city’s massive obligations and looming $700 million funding spike set for 2015.

Should lawmakers fail to act, the city has no alternative plan – at least one it’s willing to make public yet – to offer to skeptical investors and analysts who have seen numerous pension proposals here fail.

Political differences derailed reforms pushed by Gov. Pat Quinn to deal with the state’s own $82.9 billion of unfunded pension liabilities. Political leaders have said they don’t expect action until early January during a lame-duck session between November’s election and the swearing in of a new General Assembly next year. Lawmakers are expected to make state level reforms a priority so whether local government reforms can also be achieved is even more uncertain.

“I have confidence we are going to deal with it in January…..because we have to deal with it. The state has to deal with this. The city has to deal with it,” Emanuel said Thursday in a discussion of his proposed $8.3 billion all-funds 2013 budget hosted by Bloomberg in its Chicago office.

Emanuel is depending on lawmakers to “do what’s right” – especially the 20% to 25% of retiring lawmakers with less at stake during a lame-duck session.

In the meantime, Emanuel said the City Council would hold additional hearings on its pension woes in a followup to a recent hearing during which representatives of the city’s four funds laid out their condition. Emanuel also intends to work with mayors in the region to draft reform principles for the General Assembly’s consideration.

“I am going to push to get this done,” he said, adding that he’s informed legislative leaders and Quinn that he would spend as much of his own political capital as necessary.

The city faces a pension contribution increase to $1.2 billion in 2015 from $476 million this year under a state reform package adopted several years ago that puts the police and firefighter funds on the path towards full funding status. Chicago’s Municipal and Laborers’ pension funds are headed toward insolvency in the mid to late 2020s. Chicago was carrying total unfunded liabilities of nearly $15 billion based on 2010 actuarial reports. The city estimates that number will grow to about $19 billion by the end of 2012.

Emanuel portrayed the stark pension situation as a choice. Either lawmakers can help the city preserve its structural spending accomplishments or force its hand on deep cuts and a dramatic property tax hike. The proposed 2013 budget is balanced without tax or fee hikes.

“I want that as a prod to Springfield [the state capital] where on both budgetary and pension issues they need to get in gear – pick up the game,” Emanuel said.

Chicago has proposed freezing cost of living adjustments, raising the retirement age, and raising contributions. If adopted, the proposals would shave 40% off the city’s unfunded liabilities.

Emanuel said numerous attorneys have reviewed the proposals and believes they can withstand the likely legal challenge. The state constitution affords strong contractual protections to pension benefits for public employees. Some lawyers believe those protections extend only to accrued benefits.

Quinn proposed both COLA changes and a gradual shift in teacher pension payments from the state to local districts. Currently, Chicago Public Schools is the only district that covers the employer share of teacher pension payments. Republican opposition to the teacher cost shift killed Quinn’s reform package this year. Investors -- who demand a premium on city bond deals due to negative headline risks -- have voiced skepticism over the General Assembly’s ability to resolve its differences, but Emanuel is not offering any alternative. “You can’t do it without going through Springfield. It’s a must and a necessity,” he said.

Benefits and employee and employer contributions are set by statute. The statutory contributions have long fallen short of the actuarially required contribution. The city could on its own increase its payment but officials have said they want a comprehensive overhaul before doing so.

Former Mayor Richard Daley’s proposed $2.5 billion lease of Midway Airport that fell apart in 2009 due to the international credit crunch was earmarked to finance infrastructure and pension liabilities. The city has until the end of the year to decide whether to resurrect a lease under a federal airport P3 pilot program or relinquish its slot in the program.

Emanuel would not tip his hand either way Thursday. “We are in the process of reviewing it right now” and “analyzing choices,” he said.

City budget director Alexander Holt and Comptroller Amer Ahmad outlined structural improvements in the city budget Thursday. Employee healthcare costs last year were expected to rise to $600 million in 2013 but are being held to about $466 million and debt collections have nearly doubled over the last two years to $208 million.

City tax revenues are up by $42 million and an ending balance of $30 million to $40 million is anticipated. Though narrow, the city benefits from a reserve of $634 million primarily from its 2005 Skyway toll bridge lease. Daley had relied on reserves from the 2009 parking meter lease to prop up his last few budgets. Emanuel’s 2012 budget earmarked $20 million for the reserve and another $15 million is in the 2013 budget.

Earlier this year, Moody’s Investors Service revised its outlook to negative on Chicago’s $8 billion of Aa3-rated GO debt, primarily because of its pension crisis. Fitch Ratings affirmed the city’s AA-minus rating and stable outlook. Standard & Poor’s affirmed its A-plus rating and stable outlook.

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