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Chicago still needs to reform pension system

With no reform, 30% of the city's budget could go to pension contributions in 2015

Rahm Emanuel Bloomberg
Chicago Mayor Rahm Emanuel: The pension crisis is not truly solved until relief is brought to Chicago and all of the other local governments across our state that are standing on the brink of a fiscal cliff because of our pension liabilities.

After finally tackling pension reform, Illinois legislators now need to figure out a way to put some points on the board for Chicago.

Mayor Rahm Emanuel was unable to link legislation for the city to the state's pension reform vote on Tuesday, an accomplishment he has likened to spiking the ball on the 20-yard line.

"The work is far from finished," Mr. Emanuel said in a statement after the vote in Springfield. "The pension crisis is not truly solved until relief is brought to Chicago and all of the other local governments across our state that are standing on the brink of a fiscal cliff because of our pension liabilities. Without providing the same relief to local governments, we know that taxpayers, employees, and the future of our state and local economies will remain at risk."

If reducing retirement costs was a necessity for the state, it's even more imperative for Chicago, which faces an enormous increase in pension contributions in 2015 if nothing is done.

“We're always very aware that Chicago will be next,” said Stacy Davis Gates, political director of the Chicago Teachers Union, which remains “in stark opposition” to benefit cutbacks for teachers. “It's been done, so there's a template. The second time is always easier.”

But some tough political and financial questions await the city as it seeks a next step to reduce its retirement costs.

Illinois lawmakers acted after House Speaker Michael Madigan warned that the state's pension contributions would rise to 23.5% of the state budget — in 2030.

Under state law, which governs city pension funds, Chicago must increase pension contributions by $590 million, raising total contributions to $1.4 billion in 2015, almost 30% of the city's operating budget after mandatory interest payments.

The $9.7 billion Chicago Public School Teachers' Pension & Retirement Fund alone has a $7.1 billion unfunded liability, separate from the city's $19.5 billion shortfall in funding for its other pension funds: Chicago Policemen's Annuity & Benefit Fund; Chicago Firemen's Annuity & Benefit Fund; Chicago Laborers' Annuity & Benefit Fund; the Municipal Employees' Annuity & Benefit Fund of Chicago; and Chicago Park Employees' Annuity & Benefit Fund. Those five funds together have more than $12 billion in assets.

The state's pension reform deal may offer both a political and actuarial template for further action, but the intricate adjustments in benefits, contribution levels and other details aren't directly transferable to Chicago's plans. The same is true for Cook County's pension liabilities, which are significant but not as severe as the city's.

Without reform, it would take roughly a 35% increase in property taxes to meet required pension contributions for all local governments in the Chicago area, according to Fitch Ratings, a Wall Street credit rating agency that recently downgraded the city's credit rating three notches. Alternatively, budgets would have to be cut by a similar amount or there could be some combination of both.

Even after adjusting the state's reform plan for Chicago, it may not generate enough savings, given that the city's plans already have less generous cost-of-living adjustments than the state had. That means the city would have to seek a different formula of reforms that may or may not be as politically achievable as the state model.

“You can design our own pension reform, but what if you can't pass it?” said Cook County Commissioner Bridget Gainer, who chairs the county's pension committee. “Do you want to take a bird in hand and know they'll approve it, or end up with nothing?”

Just one thing is clear: Reforms at the state and local level ultimately will have to get through the courts, given that the state constitution protects pension benefits from being reduced.

“It doesn't matter who the mayor is, you can't skip over the constitutional challenge,” said Michael Shields, president of the Fraternal Order of Police union in Chicago. “If there is reform or reneging, I can promise 100% that there will be litigation.”

"Chicago still needs to reform pension system" originally appeared on Crain's Chicago Business, a sister publication of Pensions & Investments.