The time has come for Chicago Mayor Rahm Emanuel to exhibit leadership.
Chicago is facing a pension funding crisis that is costing taxpayers money each day it remains unresolved.
Re-elected this month to a second term with a definitive runoff vote total of nearly 56%, Mr. Emanuel has an opportunity to lead by bringing together the various parties to find solutions to city and school pension funding problems that require contributions of more than $1.2 billion in coming years.
Now that the politics of the election season are behind him, the mayor can set the tone for a discussion that has to happen in his city and frankly, nationwide.
An annual study by Chicago-based investment bank Loop Capital Markets found there are more than 3,770 local government pension plans in the United States. That is 15 times the number of state-administered plans. Local plans are under more funding stress than state plans. Local pension plans tend to have lower funded ratios than state plans, Loop's research found.
“Local plan liabilities are often solely the responsibility of one governmental entity, making unfunded liabilities more of an issue,” Loop analysts wrote in the September 2014 report.
Contributions to public pension funds are claiming larger and larger shares of public governmental budgets nationwide, and the proposals to cut public employee benefits or investment managers' fees are political footballs.
But in the most underfunded cases, including Chicago's, pension shortfalls can't be addressed by benefit or fee cuts alone, nor can the pension funds' investment returns be expected to close the gap.
That is where leadership will come in.
In Chicago, where the city faces roughly $20 billion in unfunded liabilities across its four funds — the $5.1 billion Chicago Municipal Employees' Annuity & Benefit Fund, $1.4 billion Chicago Laborers' Annuity & Benefit Fund, $3.3 billion Chicago Policemen's Annuity & Benefit Fund and $1.1 billion Chicago Firemen's Annuity & Benefit Fund — the first step is to avoid a crisis.
Ratings agencies have cut, and indicated they would cut further, the city's debt rating if the pension issue is not addressed.
Such a move would make all of the city's short-term and long-term spending more expensive by raising borrowing costs. Lois Scott, Chicago's chief financial officer, linked the issues in an affidavit in an ongoing court challenge to past city pension reform.
“The pension funding crisis adversely impacts both the city's access to the capital markets and its borrowing costs, which, in turn, negatively affect the city's efforts to stabilize and reduce its overall debt,” she said.
Chicago is already paying more to borrow than an investment-grade credit should.
So with all this as a backdrop, a few things are clear about Chicago's pension underfunding: It did not happen overnight, and the pension contribution spike that is coming due is the product of a state law that could be changed.
A bill is pending in the state Legislature that could extend the so-called payment cliff dates, but so far, the chance of help coming from a state that has its own pension funding problems to address look slim.
The pending legal challenges to prior city and state pension reform efforts could make the situation even worse if the earlier reforms are overturned.
So in the glow of his recent victory, Mr. Emanuel has an opportunity.
He has political capital, and it is time to spend some.
The pension problems are political problems; not easy to solve, but solvable.
According to a report this month by Standard & Poor's Co. analyst Helen Sam-uelson, Chicago needs to “articulate and implement a plan by the end of 2015 to sus-tainably fund its pension contributions.”
That plan could include phasing in the required pension payments over a longer period of time, avoiding the immediate crisis.
In the longer term, additional money for pension contributions needs to come from somewhere. Perhaps the city could raise the property tax, or the state could raise its sales tax and/or broaden its base. Another option would be for Illinois to start taxing retirement income, but it is not clear that anyone is prepared to fight that battle at this time.
Other tax options are probably out there as well, but raising taxes will take political clout, persuasion and compromise on the part of elected officials and public employees.
With political experience at the city and national levels, Mr. Emanuel — who previously negotiated the now-challenged municipal employees' and laborers' pension reforms — can bring together the forces necessary to help the city work out an honest, long-term solution to the pension funding problems.
Perhaps if he shows courage and leadership and builds a coalition of support for a long-term public pension funding fix for Chicago, it will embolden mayors and public leaders around the country to tackle their pension issues. n