CHICAGO -- Illinois Gov. Pat Quinn signed legislation Monday to overhaul two of Chicago's struggling pension funds.
Monday was the deadline for Quinn to sign, veto, or use his amendatory veto powers to alter Senate Bill 1922, which is designed to stabilize the city's municipal fund and its laborers fund, both currently headed toward insolvency. If he had not acted, the legislation would have taken effect automatically.
Quinn had previously raised concerns about the city's plan to rely heavily on its property tax levy to fund a $750 million infusion of revenue to the funds.
Chicago Mayor Rahm Emanuel agreed to remove language in the bill that would have required at least half of the city's increased contributions to come from property taxes, but it's expected the city will still rely heavily on that levy. Quinn noted the language the change on Monday.
"This legislation includes much-needed reforms that will help secure Chicago's financial future," Quinn said in a signing statement addressed to the General Assembly, also urging the mayor and city council to rule out a property tax increase.
"Chicago's finances can and should be set on the track to long-term stability in a way that does not hit homeowners the hardest," Quinn said.
The city is carrying $19.5 billion of unfunded obligations in its four pension funds — which also include a police fund and firemen's fund -- for a collective funded ratio of 35%, and the fiscal pressures have driven a steep credit deterioration.
Emanuel thanked the governor in a statement issued after Quinn signed the bill and said he would work on finding alternative finance streams to fund at least the first year's higher contribution.
"This pension reform and retirement security plan marks a significant step forward for Chicago," Emanuel said. "This balanced plan relies on efficiencies and savings as part of a long-term funding solution, and I intend to work with City Council in the coming months to find alternative options to replace property taxes as the source of the City's first pension payment."
The city crafted the plan with the help of most unions impacted, but several remain opposed. That means a lawsuit challenging the constitutionality of the benefit cuts will likely be filed.
The legislation allows Chicago to increase its contributions to the two funds and set future payments at an actuarially based level after a five-year ramp up. The current statutory language in the municipal fund reads that the city's contributions are limited to "an amount not to exceed" 1.25 times what employees contributed to the fund two years prior.
The plan also calls for higher employee contributions and some benefit cuts, including a reduction in existing annual cost-of-living increases.
Fitch Ratings in a commentary on the legislation labeled the city's proposed ARC structure a "weak funding standard" given the ramp-up period and warned that it puts off any significant progress in reducing the unfunded liabilities.
Fitch said it considers funding levels below 70 % to be weak.
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.
City council members have also pushed back against the heavy reliance on property taxes to fund higher city contributions. One potential source for the first year's payment is legislation signed by Quinn that allows the city to raise its emergency services surcharge on telephone bills, which could raise about $50 million annually, freeing up general fund revenue now earmarked for the services.
Moody's rates Chicago's general obligation bonds Baa1 with a negative outlook. Fitch assigns its A-minus rating and a negative outlook, and Standard & Poor's assigns its A-plus rating and negative outlook. Analysts have called the legislation a positive step forward that would restore solvency to the two funds, though any benefits through a notable impact on overall liabilities would be years away.
The city is facing a more severe challenge in the form of a $600 million hike next year in its contributions to fund the police and fire funds. The higher payments are required by a prior state mandate aimed at moving local governments' public safety funds to a 90% funded ratio by 2040. The city is expected to seek separate legislation delaying the higher payments and overhauling benefits.
The police fund carries $6.9 billion of unfunded obligations and the fire fund $3.1 billion. Chicago Public Schools' teachers' pension fund is also in need of a fix. It has $6.8 billion of unfunded liabilities for a funded ratio of 59.9%.
