CHICAGO — Illinois lawmakers wrapped up their annual veto session Thursday without acting on a state pension fix, but they did pass a pension overhaul for the Chicago Park District that is being labeled a framework for potential city changes.
Gov. Pat Quinn and others had pressed lawmakers to break their two-year impasse on a plan to stabilize the state's pension system. The state is carrying more than $100 billion of unfunded obligation and its payment in the current fiscal year rose by nearly $1 billion. The pension mess has driven the state's general obligation credit deterioration and it is now the lowest rated state at the low-single A level with a negative outlook.
Legislative leaders have been tinkering with a framework for a reform package crafted by a legislative conference committee in recent months. It would shave $138 billion off state payments in the coming decades. Leaders said they are awaiting an actuarial report on additional changes before putting forth a legislative package.
"All the leaders have agreed we are not going to vote" until the calculations are in, said Senate President John Cullerton, D-Chicago. Leaders said a special session could come before the end the year to seek action on an overhaul if bi-partisan support is accomplished. The new regular session begins early next year but lawmakers face distractions in the 2014 election, a fiscal 2015 budget, and the looming partial expiration of a 2011 income tax hike.
The park district overhaul surfaced during the veto session and moved swiftly through the General Assembly where it was approved in the House on Wednesday and then the Senate on Thursday. The plan was sponsored in each chamber by its leaders, Speaker Michael Madigan, D-Chicago, and the Senate's Cullerton.
The plan was assembled by the district with the city's help after negotiations with the pension fund and impacted workers. City officials believe it could be applied to its own four pension funds. The city is carrying more $19 billion of unfunded liabilities and faces a $600 million spike in its payments in 2015.
The city and park district are among those slapped with downgrades over their pension woes and ties to the city. The newly approved legislation puts the district's fund on course to reach a 90% funded ratio in the coming decades. The district closed out 2012 with unfunded liabilities of $550 million for a funded ratio of 43.4%.
"This legislation reflects a balanced approach of reform and revenue, giving employees, retirees, and taxpayers the security and certainty they deserve, but that has long been missing," Chicago Mayor Rahm Emanuel, who holds sway over park district board appointments, said in a statement.
Quinn's office has not said whether the governor would sign it. The plan was not endorsed by all district unions and could face a challenge on grounds it violates the state constitution which grants contractual rights to pension benefits and protects them from being diminished or impaired.
Under the plan, the retirement age for some employees would rise, pensionable salary limited, and employee contributions would rise to 12% from 9% of salaries by 2019 until a 90% funded ratio is achieved when the contribution would drop to 10.5 %.
Cost-of-living increases would shift for retirees who now receive non-compounded annual increases of 3% to the lesser of 3 % or one-half the rate of inflation. The annual increase would be suspended in 2015, 2017, and 2019.
The district would phase in a hike in its contribution levels from 1.1 times employee contributions to 1.7 in 2015 and continuing upward to 2.9 times in 2019 with that level remaining in place until the fund is 90 % funded. The district would also make supplemental payments between 2015 and 2019.
If CPD does not make its scheduled contributions, the fund can ask the courts to compel it to comply.
The district was hit with multi-notch downgrades from Moody's and Fitch Ratings over the summer ahead of a GO sale. The district was dropped from AAA to AA and assigned a negative outlook by Fitch and lowered to A1 from Aa2 and assigned a negative outlook by Moody's. The district has $428 million of GO limited tax debt and $448 million of GO unlimited tax debt.
"The funding level of the district's pension plan has rapidly deteriorated and will reach 0% in under 10 years if current statutory underfunding of the actuarially required contribution continues," Fitch wrote. The district's pension woes overshadow its otherwise strong financial position supported by strong reserve levels and prudent fiscal management.
The district paid a penalty to borrow over the summer, hurt not just by its own woes but by Moody's triple-notch downgrade of Chicago's GOs and the state's credit woes. The district's 10-year paper paid an interest rate of 3.87%, more than 100 basis points over the Municipal Market Data benchmark on top-rated municipal 10-year paper of 2.80%. The Municipal Market Advisors benchmark was 2.95% that day. A review of other double-rated credits in the market that week paid yields in the range of 3.10 to 3.25 %.