CHICAGO – Tucked into one of three bills that make up Illinois’ pending fiscal 2018 budget package is Chicago’s overhaul of its municipal and laborers’ fund.

The changes aimed at saving the funds from insolvency were included in the final version of Senate Bill 42 filed by the House’s lead budget negotiator, Rep. Greg Harris, D-Chicago. It implements state spending and cuts in the next budget and is known as the budget implementation bill.

Senate Bill 42 was narrowly approved by the Democratic controlled House with help from 15 GOP members who broke with Gov. Bruce Rauner to support the full package that includes $5 billion of new revenue in Senate Bill 9 and a $36 billion spending bill laid out in Senate Bill 6.

The Democratic controlled Senate followed with the help of one Republican vote on Tuesday. Rauner quickly vetoed the full package and the Senate successfully overrode him later in the day.

The House will attempt an override Thursday. “The House will hold a vote on Thursday, July 6 to override the governor’s vetoes of the balanced budget sent to him,"Speaker Michael Madigan, D-Chicago said Wednesday. "House Democrats look forward to working with our colleagues on the other side of the aisle to begin healing the wounds of the last several years."

Inclusion of the overhaul follows Mayor Rahm Emanuel’s announcement late last month that he planned to bypass state approval – at least temporarily – to funnel more money to the funds. The move was driven in large part to preserve the stable outlooks two rating agencies had assigned to the city’s battered ratings after it announced plans to raise funding.

Various reform measures that require new employees to pay more still must win final state approval. Emanuel said Rauner’s threatened veto left him no choice but to act on the contribution side.

“Chicago is a welcoming city and always will be, and we will not be blackmailed by President Trump's Justice Department,'' Mayor Rahm Emanuel said Monday.
Chicago Mayor Rahm Emanuel's pension restructuring will become law if the Illinois House successfully overrides Gov. Bruce Rauner's veto of a state budget package. Bloomberg News

“I wanted to send a clear message….that we are going to do exactly what we said we are going to do,” Emanuel said of S&P Global Ratings and Fitch Ratings, which both have elevated the city’s outlook to stable from negative in recognition of its plan to boost pension funding.

Fitch rates the city’s general obligation bonds at BBB-minus, while S&P has the city at BBB-plus. “Timely action on pension funding is crucial to the city's budgetary stability….potential delays to increased contributions beyond 2017 could lead to credit deterioration,” S&P wrote in March.

S&P weighed in on Emanuel’s plan Wednesday saying it provides short-term salve by relieving “near-term pressures” and staving off fund insolvency, but “falls short of a sustainable solution.”

State approval remains crucial. S&P said that inclusion of the pension changes in the budget package is no guarantee, as passage “is still not a foregone conclusion.” Analyst Carol Spain said the rating agency is watching budget developments closely. The employee concessions would generate about $2 billion of savings over 40 years, but they are backloaded.

State approval also remains crucial because the city’s action to pay more into the funds than allowed under state statute. “The city believes that the ordinance, coupled with the looming funds' insolvency, would strengthen its legal position,” S&P wrote.

Chicago is also far from out of the woods on pensions. “While, in our view, both the city ordinance and pension reform proposal are good first steps toward stabilizing the municipal and laborers' plans, Chicago will still face large and growing liabilities for many years to come, and more change is necessary if these plans are to reach healthy and sustainable funded levels,” S&P added.

Rauner vetoed the city’s pension overhaul earlier this year; a. Another bill to accomplish the same thing won legislative approval, but lacked House Republican support needed to survive a threatened veto. Rauner has slammed the overhaul as too detrimental to taxpayers, but said he would sign if Emanuel uses his political muscle to help win state pension changes.

The higher contributions rely on a water/sewer tax and 9-1-1 fees. Additional revenue will be needed in 2023 when actuarially based payments take effect.

Critics, including Moody’s Investors Service, which dropped the city to junk in 2015, have said the plan just stems the worsening condition of the two funds and takes more than a decade to achieve any improvements which could be dampened if investment returns fall short.

The funded ratio of the municipal fund fell to 30.5% in 2016 from 32.9% in 2015, while the funded ratio of the laborers’ fund fell to 50.36% from 52.99%. The municipal fund’s net pension liabilities total $18.86 billion. The laborers’ plan’s net pension liabilities total $2.53 billion. The city was carrying $33.8 billion of net pension liabilities collectively in its four funds based on fiscal 2015 figures.

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