CHICAGO – With two its pension funds headed toward insolvency and a $600 million spike in contributions looming for the other two, Chicago is ratcheting up pressure on state lawmakers to tackle legislation that both overhauls pensions and delays a costly reckoning in 2016.

“The Chicago economy cannot sustain” huge property or other tax increases to support its pension funds without reform, the city’s chief financial officer Lois Scott said during her keynote address to the National Bond Lawyers Association’s Annual Bond Attorneys Workshop here Wednesday. “What companies would relocate or stay here if we cannot provide some level of financial security and stability” on taxes. Officials have said the same holds true for residents.

With most local government pension contribution levels and benefits in Illinois set in state statute, lawmakers have been at an impasse over how to deal with the state’s own massive unfunded obligations of $95 billion.

“We are literally at the mercy of state legislators….many of whom have no understanding of what’s at stake in the city of Chicago or for our economy,” Scott said. “This disconnect is really affecting Chicago.”

A legislative conference committee is expected to unveil a new reform package, but it’s unclear whether a vote on it will come anytime soon. The hope among local governments is that the state plan overhauling benefits and contributions could then be applied to local governments, although a state constitutional challenge is expected.

Scott laid out a bleak budgetary picture for the city absent reform. Its pension crisis has driven a rise in city interest rate penalties and credit deterioration, including a three-notch drop this summer in its general obligation rating to A3 by Moody’s Investors Service. The rating company retains a negative outlook. 

“Clearly every policy issue that we face comes back to this legacy liability called pensions,” Scott said. “It crowds out services in every single area.”

Chicago’s pension crisis is more acute than other local governments’ here. Its four funds collectively carry $19.5 billion of unfunded liabilities for a funded ratio of 35% with two – the municipal employees fund and the laborers’ fund -- headed toward insolvency in the coming decades absent reform.  “Every month our funds are liquidating investments” to cover benefit claims, Scott said.

The near-term strain comes from a $600 million spike in city contributions owed in 2015 – which must come from a $3 billion corporate fund budget -- for its police fund and firefighters’ fund. That’s due to a state- mandated shift from a statute-based formula to an actuarially required contribution mandated in 2010 reform legislation. The city would feel the jump in its 2016 budget.

The required contributions put both funds on the path to a 90% funded ratio by 2040, but will drive total payments up to $1.07 billion in 2015 and $1.11 billion in 2016 from $480 million this year.

The city is pinning its hope for relief from the payment spike in legislation, known as Senate Amendment 002 to House Bill 3088, which calls for an incremental increase in city property tax levels between 2018 and 2021 and delays the full shift to an ARC payment for the police and fire finds until 2022. It pushes back the year when the state comptroller would be required to withhold state grants owed to the city should it fail to meet the ARC from 2016 to 2023. It’s sponsored by Senate President John Cullerton, D-Chicago.  An aide said a timeline for its consideration has not been set. Gov. Pat Quinn has refused to sign any pension relief for local governments until lawmakers pass reforms. While providing short-term salve it would worsen the  funded ratios.

The difference between the lower statutory payment made by the city and ARC needed to keep the funds healthy has risen steadily over the last decade. In 2003, the difference was just $108 million while in 2012 the gap reached more than $1 billion. 

Members of the Chicago Police Sergeants Association rejected a framework laid out by Emanuel earlier this year for city reforms including  and a delay in the contribution spike. No alternative has been offered by the city as it continues to stress that state action is needed.

The city under former Mayor Richard Daley was unwilling to increase its contributions to an ARC level on its own. Chicago  now argues it can’t afford such a move. Scott said Wednesday the city believes any attempt to raise property taxes on its own to bolster contributions could face a legal challenge by taxpayers since the contribution rates are set by a state formula. The city believes it could face a similar challenge if it attempts to tap other tax revenues.

Scott questioned the worth of debating the size of the city’s pension burden, which differs based on an actuarially-applied review, Moody’s Investors Service’s new formula, or Governmental Accounting Standards Board rules. Moody’s more conservative adjusted net pension liabilities calculates the city’s net liability at $36 billion. She said the focus should be on solutions. Whatever the number, she said, “we still have to take pretty significant steps forward.”

Standard & Poor’s this month revised its outlook to negative on the city’s A-plus rating while Fitch Ratings in June put the city’s AA-minus rating on negative watch.

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