CHICAGO – Legislative backers of Chicago's funding overhaul of its municipal and laborers' pension funds expect a vote in the final days of the General Assembly's veto session after dropping language from the bill that would have subordinated pension contributions to bond repayment.
The latest version of the legislation in the form of amendment four to Senate Bill 2437 was submitted Monday by the pension bill's sponsor State Rep. Barbara Flynn Curie, D-Chicago. The amendment alters the revised bill submitted in amendment three on Nov. 14 at the start of the legislature's annual veto session. It received a hearing Tuesday afternoon by the House Personnel and Pensions Committee and was approved, but the legislation hit a new snag.
The city and one union that represents some municipal fund members remained at odds over whether city actuaries or fund actuaries should determine whether the value of new employees' reduced benefits upon retirement are worth their proposed 11.5% contribution. The union wants the determination made by the fund. The legislation establishes a third tier for new employees and caps contributions at either 11.5% or the "normal costs" of their benefits. Curie said she believed the issue was "resolvable" and hoped simply to amend the legislation on the House floor. The committee, however, wants her to return with the fifth amendment that resolves the issue before the legislation goes to the floor.
The fourth amendment dropped pension board changes proposed by the city and language that would have given bondholders priority status should the funds seek court action propelling city payments as permitted under the legislation.
The deleted language was included in a provision giving the courts leeway in ordering the city to make the required payments. It allows the court to order a "reasonable payment schedule to enable the city to make the required without significantly imperiling the public health, safety, or welfare."
The deleted language reads that "any payments required to be made by the city … are expressly subordinated to the payment of the principal, interest, premium, if any, and other payments on or related to any bonded debt obligations of the city outstanding or to be issued, for which the source of repayment or security thereon is derived directly or indirectly from any funds collected or received by the city or collected or received by the city."
"The language was a big deal for some people who were saying this could cause litigation," said a state House source. "The idea is that by deleting the language you make the bill less contentious and it helps its chances."
The legislation puts into statutory form the city's proposed funding scheme changes designed to stave off looming insolvency based on the current statutory contribution formula. It puts the funds on a path to a 90% funded ratio in 2057.
The contribution schedule closely mirrors one previously approved by lawmakers for the city's other two funds that cover police and firefighters. The city's combined $33.8 billion of net pension liabilities have dragged its ratings down to a low of junk.
The dropped language mirrored a provision included in the police and fire legislation that was approved by lawmakers who successfully overrode Gov. Bruce Rauner's veto earlier this year. The sponsors want to raise as much support for the bill as it too could race a Rauner veto given the ongoing budget dispute between the Republican governor and the legislature's Democratic majority.
Investors favored the clause as both a sign of the city's commitment to meet its obligations and for the potential favor it might receive in a legal battle. The pension funds opposed taking a backseat to bondholders.
The worth of the clause remains unclear. It's uncertain whether the courts would apply the provision should the city argue it could not afford both pension and debt payments as the issue would likely be litigated.
The language of any future statutes paving the way for a city bankruptcy filing is unknown and could bump up against federal bankruptcy rules. The state currently does not generally permit Chapter 9.
Chicago Mayor Rahm 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.
The city's plan establishes a funding schedule that puts the two funds on track to reach an actuarially required contribution in 2022. 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 in which city contributions are based on a percentage of what employees contribute.
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. Both are shortfalls attacked by critics. A record $543 million property tax approved last year is funding higher contributions to the police and fire funds but the city will also need a new revenue source once actuarial payments 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 BBB-plus by 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.