Illinois Gov. Bruce Rauner’s proposed pension reform overhaul is the subject of ongoing House hearings.

CHICAGO - Chicago officials warned state lawmakers Tuesday that Gov. Bruce Rauner's sweeping statewide pension proposal offers Chicago Public Schools only a temporary salve and would force the distressed district back into crisis mode in two years.

"The fact of the matter is CPS' pension payment obligations have placed CPS itself in dire financial straits," Chicago deputy mayor Steven Koch said during a state legislative hearing Tuesday on the proposal Rauner released earlier this month. The plan would impact funds for Cook County, Chicago schools, state funds, and the public safety funds for Chicago and other local governments.

The urgency of CPS' fiscal crisis was underscored when Fitch Ratings downgraded the district to junk late Monday, action that followed a similar move by Moody's Investors Service in May. Kroll Bond Rating Agency and Standard & Poor's still assign investment-grade ratings to the board's $6 billion of debt.

The Rauner plan calls for the state to cover a greater share of the employer's contributions bringing the state's share in line with what it pays toward the state system that covers teachers outside Chicago, but only for fiscal 2016 and 2017. The shift would shave about $200 million annually off CPS' payments in those years.

Mayor Rahm Emanuel, who appoints Chicago Board of Education members and handpicks the chief executive officer, wants the state pickup made permanent.

"The plan fails to address the structural problems that we think are very much at the heart" of the district's fiscal pension and budget woes and "returns CPS to the exact financial position where we find ourselves today," Koch warned members of the House Personnel and Pensions Committee.

The district's scheduled payment for fiscal 2016 of nearly $700 million is a central driver of a $1.1 billion deficit the district must close in the budget it will release later this month. The district, which has chipped away at the deficit with the recent announcement of $200 million in cuts, is saddled with growing payments to cover $10 billion of unfunded obligations for a fund that is about 52% funded. The state contributed $62 million in fiscal 2015, $12 million under a statutory requirement and the other $50 million by an annual appropriation.

The Rauner proposal also calls for teachers to cover about $170 million in payment costs picked up by the district, which Emanuel supports but the teachers' union opposes.

Rauner's proposal includes Emanuel's plan for the city's police and firefighters funds, to phase in a shift to an actuarially based contribution level and extend the amortization schedule to reach a 90% funded ratio by 15 years. Lawmakers approved the changes, supported by the police and firefighter unions, this spring, but the legislation has not been sent to Rauner over fears it could fall victim to a state budget impasse.

Koch said the plan would shave about $200 million off a $550 million spike due next year in the city's contributions under a 2010 state mandate imposed on all local government public safety funds.

The city has said it's grateful the public safety changes are in Rauner's proposal but officials have resisted expressing outright support or criticism for other pieces of the plan considered controversial and unlikely to clear the Democratic majority in the General Assembly.

Rauner wants to give local governments more "tools" to save on costs by stripping unions of some of their collective bargaining rights, such those covering pension-related, wage, and work-hour issues. The proposal also puts a Chapter 9 bankruptcy provision on state books, a maneuver unions accuse Rauner of proposing solely as a means to give local governments leverage in negotiations.

The Personnel and Pensions Committee, chaired by state Rep. Elaine Nekritz, D-Northbrook, is holding a series of hearings on the Rauner proposal focusing on various pieces of the plan that was unveiled in bill form but has not yet been introduced. The Tuesday hearing centered on Chicago, CPS, and Cook County.

During the hearing, unions that represent firefighters and police officers stressed their support for Chicago's public safety changes. The proposal, also included in Rauner's plan, earmarks any profits from a proposed Chicago casino to the pension funds and gives unions the right to go to court if the city doesn't make good on that provision.

"It's a step in the right direction," said firefighter union representative Dan Fabrizio. But the unions are opposed to Rauner's proposal to, in effect, create a three-tier package of benefits, saying it creates "animosity" among the rank and file. Employees who started in recent years already fall under a reduced benefit structure known as Tier 2.

Chicago Teachers Fund representatives testified on their opposition to various provisions of the legislation, including the Chapter 9 option. Rauner's proposal would shove the district "into a tailspin of continued fiscal irresponsibility," said Lois Ashford of the teachers' fund.

The state and local governments are looking for a constitutional route forward on pension reforms as Chicago grapples with a $20 billion unfunded tab and the state a $111 billion tab. The pension struggles have dragged one of the city's ratings down to junk and contributed heavily to the state's credit rating deterioration to the lowest among states.

The Rauner plan would shave $15 billion to $17 billion off the state's tab and save the state $1 billion in annual contributions with the full impact statewide resulting in $2 billion in savings, the administration said.

At a prior hearing, House Democrats voiced concern over the constitutionality of the plan in the wake of constraints placed on the state's ability to cut benefits by the Illinois Supreme Court in its May opinion voiding the state's 2013 overhaul.

The Rauner proposal borrows from Senate President John Cullerton pension reform "consideration" model that seeks to pass constitutional muster by getting employees to accept reduced benefits in exchange for some perks.

A consideration model would apply state plans, downstate public safety plans, which would be consolidated, and the Chicago Teachers' Pension Fund. Cook County could choose between its proposal or the consideration model. The Rauner proposal calls for the consolidation of 640 public safety funds across the state.

Rauner's plan would set a baseline of benefits and then offer incentives, like a one-time pay hike or vacation time, to move into the lower-cost system, according to Rauner deputy counsel Dennis Murashko and policy advisor Michael Mahoney.

But to stay in the higher-tier benefit plan, the employee would have to accept changes to their current vacation time and pay. Murashko argued that such perks are not protected by the pension clause and that's why they could pass a legal test.

Some Democrats said the proposal appears to offer only one cut in exchange for another, with no benefit on the table. Rep. Robert Martwick, D-Norridge, raised that concern, asking: "I'm wondering how removing benefits employees currently enjoy and then offering them back to them, how does that equate into adequate consideration?"

 

 

Subscribe Now

Independent and authoritative analysis and perspective for the bond buying industry.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.