CHICAGO – Chicago Mayor Rahm Emanuel’s plan to save two city pension funds from looming insolvency was dragged into the middle of the state’s historic budget impasse.

Legislation Chicago needs to implement its plan to raise funding levels for the municipal fund and laborers fund won House approval but lost the Republican support needed to overcome a threatened veto.

Senate Bill 14 passed along party lines in a 63-45 vote with two voting present Thursday evening. The withdrawal of Republican support means the legislation lacks the 71 votes needed for a veto override to succeed.

Gov. Bruce Rauner vetoed an identical bill passed by the prior legislature.

The vote undercuts the confidence expressed by Chicago’s chief financial officer Carole Brown in an investor call that the overhaul was expected to pass with solid bipartisan support.

The current bill passed the Senate in bipartisan 38-11 vote on January 25. The bill replicated one vetoed by Rauner in March, which killed the measure because it was passed by a prior legislature.

Illinois State Capitol
The Illinois House approved Chicago's revised municipal and laborers pension funding schemes without Republican votes that will be needed if Gov. Bruce Rauner vetoes the legislation. Adobe Stock

The original bill passed the House in December on a strong bipartisan 91-16 vote and the Senate signed off in a 41-0 vote.

On the floor Thursday, the new bill’s House sponsor, Rep. Barbara Flynn Curie, D-Chicago, called the funding changes “a very important solution to a very important problem” that saves the funds from insolvency.

But Republicans said their support is now tied to statewide pension reforms as Rauner has demanded.

“House Republicans are sensitive to the fiscal issues confronting Chicago and its pension system,” said House Minority Republican Leader Jim Durkin, R-Western Springs. “However, we are confronted with the same problems with our five state pension systems which for all practical purposes are in worse shape.

“Unless paired with statewide pension reform, SB 14 today is a non-starter. The deadline to pass the Chicago pension bill should be extended so as to include with negotiations on broader pension reform,” he said.

Republicans had stuck with the city last year in overriding a Rauner veto of the city’s similar police and firefighter pension fund changes. The Thursday vote illustrates how tensions have intensified between Democrats and Republicans as the state’s budget gridlock nears the two-year mark and that puts the city in a precarious position.

Rauner has called on Emanuel to use his political muscle to help with the budget impasse and statewide pension reforms, but Emanuel has dismissed that pressure.

In a call with investors after Rauner’s March veto, Brown said: "We are pretty confident or optimistic ….we would have enough votes to override.”

One market watcher at that time said that, given the rising partisan tensions, there was no guarantee of future cooperation. "The level of chaos is rising and Chicago will be dragged into that and it undermines the city's narrative" that it's turned a fiscal corner, Matt Fabian, partner at Municipal Market Analytics, said after the veto.

The Rauner administration did not comment after the Thursday vote on whether the governor would again veto the legislation but pointed to Rauner’s veto message to serve as a comment. In his veto message, Rauner called the changes “another kick-the-can approach to pension funding that landed Chicago in fiscal crisis in the first place.”

Rauner wants the city reforms to be part of a larger, statewide package that includes state pensions and other local governments, but a path to such changes is unclear. The state Supreme Court has shot down as unconstitutional past city and state plans that cut benefits.

Cullerton-crafted state pension changes estimated to save the state about $1 billion annually would ask employees to accept benefit cuts. In exchange, future raises would continue to count toward their pensionable salary. Some lawyers believe the plan can withstand a state constitutional challenge but others don’t and unions have threatened a lawsuit. The reforms are part of the Senate’s stalled “Grand Bargain” budget fix.

The state is faced with steadily rising contribution demands to address $126.5 billion of unfunded obligations, but the municipal and laborer funds' woes are more acute because they are headed toward insolvency in the coming decade without changes.

If the city’s reforms are not soon enacted, the funds' weak condition will continue to deteriorate. City bonds could suffer some lost value in secondary market trading and some investors might shed holdings over concerns. The city paid a steep penalty of more than 300 basis points on its general obligation sale earlier this year, but does not plan another GO borrowing until 2019. The bigger risk lays in state credit developments.

Emanuel won City Council approval for a new water-sewer tax to fund higher contributions to the municipal fund last year. An emergency phone surcharge is in place to cover higher payments to the laborers' fund.

The city's combined $33.8 billion of net pension liabilities in its four funds have dragged its ratings down to junk Ba1 from Moody’s Investors Service. The city's other ratings top out at BBB-plus. Fitch and S&P Global Ratings shifted their outlooks on the city’s credit to stable from negative after it came up with a plan for its pensions.

The legislation would enact funding scheme changes for the two funds which are now on course to exhaust assets based on the statutory contribution formula now used. The revised formula would put the funds on a path to a 90% funded ratio in 2057. The revisions also require new employees to contribute more to the funds.

After a five-year ramp of increasing city contributions, the city commits to making an actuarially based contribution. The current formula, which has allowed the funds' health to falter, is based on a multiplier tied to recent employee contributions.

Enactment of the state law would mark the final step in putting the city's pension fixes in place. A big property tax was enacted to fund higher contributions to the city’s police and firefighter funds.

After 2022, the city's proposed funding schemes will fall short of what's needed and improved funded ratios will take decades to achieve. Critics attacked the plan for those two shortcomings.

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