Chicago mayor readies his last shot at the city's pension problems

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CHICAGO — Chicago Mayor Rahm Emanuel is expected to propose establishing a legal structure that allows the city to eventually proceed with a pension obligation bond issue but is not expected to pursue approval of the deal or its issuance before leaving office in May.

POBs will serve as one option on a menu that Emanuel will offer in a long-planned address to the City Council Wednesday, sources said. He will also back placing a state constitutional amendment on the ballot to rein in costly pension benefits that are straining city coffers.

Emanuel will call for the council to discuss the financing and legal structure for pension obligation bonds including creation of a special entity to issue the bonds, an administration source said. The size and security was not disclosed.

The city has been exploring an up to $10 billion POB deal since early August. It was sidetracked by Emanuel’s September announcement that he wouldn’t run again and then by the focus on the city's 2019 budget and rising Treasury rates that would hurt the deal’s ability to pencil out.

Treasury rates have returned to rates on par, or better, than those when the city first pitched the idea in August. Any POB would be taxable and so priced off Treasuries.

The plan the mayor is expected to be lay out Wednesday would allow for plenty of council debate on the structure. Setting up the structure is one thing, and authorization is another. It's unlikely to occur before Emanuel’s term ends in May, the source said.

“While there is no single solution to this challenge, I believe there are sequential steps we can take to keep moving the ball down the field. And I believe those steps must be based on progressive principles,” Emanuel is expected to say in his speech.

Emanuel is also expected to say that any profits the city receives from the potential legalization of recreational marijuana and from a possible Chicago casino should go to pay down the city’s $28 billion pension burden.

Existing city pension legislation already directs casino profits to pensions.

“Amending the state constitution to allow for both a progressive income tax and new agreements with labor is an important step towards fiscal stability and progressivity,” Emanuel is expected to say. Gov.-elect J.B. Pritzker wants lawmakers to approve a ballot measure asking voters to approve a shift to a graduated income tax from the current flat tax.

Supermajorities in the state legislature are required to place constitutional amendments on the state ballot, where they must be approved by a simple majority.

Pritzker and fellow Democrats who control the legislature have so far steered clear of any public discussion on a constitutional amendment which labor deeply opposes. Labor has also threatened a legal challenge on the argument that a change in benefits already promised to current employees violates state contract law.

Pritzker has called pensions a promise the state must honor and his proposed 2020 budget will work to put pensions on a “more sustainable path forward.”

The city’s four pension funds are collectively funded at 26.5%. Chief Financial Officer Carole Brown said over the fall a POB made fiscal sense and with the right security to garner an interest rate in the 5% to 6% range could lift the funded ratio to more than 50% while also easing pension payment cliffs that loom in the coming years.

After the state Supreme Court overturned Chicago's first attempt to overhaul two of its pension funds, the city since won state legislative approval for an overhaul that primarily relies on more city funding. It saves the municipal and laborers’ fund from impending insolvency and puts the two plus the two public safety funds on course to a 90% funded ratio in the coming decades.

The improvements, however, are slow in coming and remain at risk of market downturns.

Under the overhaul, the city is ramping up to an actuarial-based contribution that hits in 2020 for public safety funds with a $276 million jump. Another $310 million jump follows in 2022. The ramp up period is being funded through a property tax hike, a new water-sewer charge, and 9-1-1 surcharge so the City Council and next mayor face public tax fatigue going forward.

“These contributions must be made. There are no ifs, ands or buts about it,” the mayor is expected to say.

The city must tread cautiously on any borrowing because the wrong structure could threaten its ratings.

“Depending on the structure of the POBs and whether or not the city would make changes to its pension funding discipline, issuance could have rating implications for Chicago,” S&P said in an October review of the city budget.

Chicago is rated BBB-plus by S&P. Fitch Ratings has it at BBB-minus, Kroll Bond Rating Agency has it at A, and Moody’s Investors Service rates at the speculative grade of Ba1.

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Pension reform Public pensions Rahm Emanuel City of Chicago, IL Illinois