CHICAGO -- Chicago is readying a pension reform bill for state legislative consideration that would reduce the underfunding of two its four retirement funds through increased employee and city contributions and benefit cuts.
The city's $19.5 billion unfunded pension burden has taken a punishing toll on its bond ratings.
Rating agencies and investors have chastised Mayor Rahm Emanuel's administration over the last year for failing to come up with its own course of action while state lawmakers focused on cleaning up the state pension system. Benefits and contributions are set in state law and Emanuel has taken a stance that the state must act.
Now Emanuel's administration is taking initiative
"The plan strikes the right balance of reform and revenue, and serves as an honest framework in which everybody gives something, so that no one has to give everything," says a city presentation on the package. "It is a balanced solution resulting in a retirement system that is both affordable to taxpayers and that is solvent and secure for the city retirees of today and tomorrow, providing certainty for everyone."
The new plan, which is expected to be submitted soon to the General Assembly as Senate Bill 1922, would raise the city’s current contributions for the two plans from a current level of $830 million by about $250 million to more than $1 billion in 2019. The rise would occur in gradual annual increments continuing through 2019 when the city would then shift to actuarially required contribution levels.
The city is hoping to strike a compromise that would phase in the ARC to ease the burden on the city's tax base and spare deep spending cuts.
The city said the fix would deal with about 53% of its pension problems and would strike the right balance between city and employee sacrifice to reach a 90% funded ratio in 40 years.
The proposal would shift the current 3% compounded cost-of-living adjustment to the lesser of a 3% simple adjustment or 50% of the consumer price index. No COLAs would occur in 2017, 2019, and 2025. Some employees now who face a minimum retirement age of 67 would see it lowered to 65. Employees' current 8.5% contribution would rise in increments by 2.5% through 2019 to 11%.
A city led effort resulted in a similar but not identical Chicago Park District overhaul winning state approval late last year.
The new proposal leaves out the city's police and fire funds, which were the subject of stabilizing legislation years ago that requires a $600 million bump in city contributions next year.
The city says it can't afford that funding spike, which is due to a shift to an actuarially based contribution, but the new proposal does not address those funds. The Chicago Public Schools also are in need of a reform package.
The city says the division of responsibility to stabilize the municipal and laborers funds falls 70% on the city, 10% on employees, and 20% from reform savings. Half of the city's increases through 2020 would come from property taxes. The city would apply savings from previously adopted retiree healthcare subsidy cuts, budget savings, and other efficiencies to cover another 20%. The city would draw the other 30% from its more flush aviation and water enterprise funds making them responsible for covering their employees.
The municipal fund is 38% funded with $8.4 billion of unfunded obligations, and on a track to insolvency between 2023 and 2027. The smaller Laborers' Fund is 58% funded with $1 billion in unfunded obligations and on pace for insolvency between 2024 and 2031.
The police fund carries $6.9 billion of unfunded obligations and the fire fund $3.1 billion.
The city crafted the overhaul based on recent negotiations with unions but several of the roughly 30 unions that would be impacted blasted the plan, making litigation likely if it is adopted.
The We Are One Chicago union coalition in a statement called the plan "an unconstitutional approach that makes onerous cuts to the pension benefits of nearly 50,000 active and retired public servants."
The plan won praise on other fronts.
"This represents a balanced approach to stabilizing the city's pension funds. It has real reform and an improved funding plan. It is a reasoned approach in light of all the issues facing the city," said Ty Fahner, president of the Civic Committee of The Commercial Club of Chicago.
The city's presentation tracks Moody's bond ratings back to 1993 when Chicago carried an A1 rating. It rose to Aa3 in 2006 and hit a high of Aa2 in 2010. The credit has only fallen since then, to the current Baa1.
Moody's warned in its last report that the sheer size of the city's pension obligations threatens Chicago's "fiscal solvency." Chicago has the highest adjusted net pension liability among local governments rated by Moody's.
"Increased interest rates will hit City budget immediately, as the City will have to pay more in each budget to service debt," the city's presentation reads.
