CHICAGO — Weighed down with $15 billion of unfunded pension obligations, Chicago Mayor Rahm Emanuel called on Illinois lawmakers Tuesday to raise the retirement age, suspend cost-of-living increases and raise contribution rates to reduce the city’s unfunded liabilities by 40%.
Emanuel outlined the proposals in testimony before the a state House committee, providing for the first time specific plans aimed at reining in the city’s pension funding crisis that drove Moody’s Investors Service recently to revise its outlook on the city’s Aa3 general obligation rating to negative.
Without action, Chicago faces a $1.2 billion hike in its pension payments by 2015 due to previous state-imposed reforms aimed at shoring up its police and firefighter funds, while its two other funds remain on a path towards insolvency.
Some of the proposals closely mirror those unveiled for state workers by Gov. Pat Quinn recently. Emanuel also warned that if teachers’ reforms are not adopted, the Chicago Public Schools faces a $300 million hike in funding. Under tax cap limits, the district would be forced to cut its budget and raise classroom sizes to 55 students.
“If we do nothing, we will force taxpayers to make impossible choices between either using that money to pay for pensions or using it to pay for essential services like public safety and schools. Doing nothing will force me to choose between either letting our pension funds go bankrupt, or raising the city’s property taxes by 150%,” Emanuel told lawmakers.
Action is needed to “to resolve this crisis and ensure retirement security that is fair to both employees and taxpayers,” he added. Contribution levels and some other rules governing benefits are set by the state. Though employer and employee contributions follow a statutory formula — which for a long time did not provide enough of the actuarially required contribution to fully fund the city and state systems — the city could raise its own payments without action.
Emanuel’s plan, dubbed “The Roadmap to Retirement Security,” calls for increasing the retirement age by five years to 67 for city workers and 60 for police and fire personnel. The mayor wants to suspend COLAs for 10 years, and phase in a 5% increase in employee contributions, while also offering additional retirement plan choices. The city would not be forced to raise contributions until reforms were adopted.
Pension funds that benefit from compounded COLA have grown 30% faster than inflation in the past 10 years, warned Emanuel, who cited similar action taken by other governments, such as Rhode Island.
Quinn has proposed raising the retirement age, but calls for increasing employee contributions by only 3%. He also wants to revise how COLA increases are set.
Labor leaders attacked the proposals as unconstitutional and questioned why Emanuel had not first discussed them with the unions. The state has had to tread cautiously on reforms as its constitution affords strong protections against diminishing promised retirement benefits. Some lawyers believe that the rules protect only accrued benefits.
Quinn has proposed imposing the changes in a new plan that employees would be asked to join voluntarily. In exchange they would continue to enjoy certain perks, such as subsidized retiree health insurance coverage.
Moody’s revised its outlook on the city’s GOs due to “outsized pension pressures” and the lack of a plan to address them to date. Chicago’s current pension payments total $476 million, while a payment of $1.1 billion this year would be needed to meet the ARC.
Both the Chicago police and firemen’s funds were affected by state reforms adopted in 2010 that require escalating city payments to put the funds on the path to full funding around 2040. The Chicago laborers’ fund is headed toward insolvency in 2035 and the Chicago municipal employees’ fund will reach its tipping point in 2030.
The firemen’s fund closed out 2010 with $2.5 billion of unfunded liabilities for a funded ratio of just 32%. Chicago’s police fund closed out the year with $5.7 billion in unfunded obligations for a funded ratio of just 40%. The Chicago laborers’ fund had $542 million of unfunded liabilities for a funded ratio of 74%. The municipal employees fund had unfunded liabilities of $6 billion for a funded ratio of just 50%.