A bill that will reach Illinois Gov. J.B. Pritzker’s desk would enhance some Chicago pensions over the city's objections, raising questions about the state’s control of benefits that local taxpayers must cover.
Mayor Lori Lightfoot’s administration has warned the benefit extension to a group of firefighters could add up to $30 million to annual contributions and up to $850 million over the 35-year course to reach a 90% funded ratio. The city, which operates on a $4 billion corporate fund and $12.8 billion total budget, owes $1.8 billion in pension contributions this year.
The bill previously passed the House and it cleared the short,
Unfunded pension obligations are arguably Chicago's biggest fiscal challenge.
The collective
While Chicago can ill afford any new costs, Chicago Civic Federation President Laurence Msall says the imposition of a new benefit on a local tax base by the state government is the most alarming part.
“In the middle of the night without any recognition of the city’s opposition the legislature added a benefit without any plausible way to pay for it,” Msall said in an interview. “The city is already borrowing for its operations. In the midst of pandemic, this is so startlingly tone deaf. This is an example of why the state needs to take over all local pension funds.”
Lightfoot previously pitched the idea of the state taking over the city’s funds but Pritzker immediately shot the idea down, warning of the impact on the state’s credit that sits one notch above junk.
The Lightfoot administration and others are lobbying Pritzker to veto House Bill 2451 and fear that lawmakers will attempt to advance the same change — extending a 3% automatic cost of living adjustment to all tier one Chicago firefighters — to also cover police.
A group of firefighters that miss a birth date cutoff currently receive a 1.5% COLA. Pritzker has not said what he intends to with the legislation.
The measure would amplify pressure on Chicago’s balance sheet but local governments across the state and the state government itself are saddled with retirement liabilities that consume a big chunk of their general funds, driving tax increases, service cuts, asset sales, and borrowing. Pension measures could surface during the legislature’s spring session but whether action is taken is a guess given the state’s budget woes.
The bill hasn’t gone to Pritzker’s desk yet. It must be sent within 30 days from its Jan. 11 passage and once it arrives, the governor has 60 days to act.
“If enacted, House Bill 2451 will prove very costly for City of Chicago taxpayers by adding pension benefits without implementing reforms or addressing the city’s ability to adequately fund its firefighters’ and other pensions,” Msall wrote in a Jan. 21 letter to Pritzker.
“While the Civic Federation recognizes the important work of Illinois first responders, unilaterally burdening Chicago taxpayers during a time of significant budget stress for the city is the wrong decision,” Msall wrote.
If similar action is extended to police, the city could see an up to $90 million annual increase with an up to $2.6 billion tab through 2055. The cost would likely fall to the property tax which was raised by $94 million late last year to help wipe out a $1.2 billion budget gap.
“From day one, Mayor Lightfoot has said she believes strongly that we must work toward a comprehensive pension solution which keeps the promises made to retirees and which sets pension funds across the state on a path to solvency,” the mayor’s office said in a statement. “The passage of HB 2451, effectively under the cover of darkness in a rushed lame duck session, accomplishes neither of these important objectives.”
State Sen. Rob Martwick, D-Chicago, originally sponsored the legislation as a House member where he headed the chamber’s pension committee. He moved to the Senate in 2019 and heads the pension committee there served as chief Senate sponsor of the bill which extends the 3% COLA to Tier One firefighters born after Jan. 1, 1966.
Martwick defended the bill as a needed transparency fix for a benefit that has incrementally being adjusted multiple times in past years with agreement by the city and firefighters.
The bill was held up last year at the city's request as negotiations were ongoing with firefighters. The firefighters requested that the legislation advance.
“This legislation shines a light on the true financial condition of the fund and prevents the city from intentionally kicking the can down the road and forcing bigger tax increases in the future,” Martwick said.
The bill removed what Martwick called outdated language that understates the true value of the pension benefit paid to firefighters while allowing the city to structurally underfund its payments. That’s because he argued the city and state legislature had repeatedly moved the birthdate on the 3% simple COLA benefit and would have continued to do so in a piecemeal fashion.
Martwick called those past actions part of a wink-wink-nod-nod between the city and firefighters.
“Is COVID a good time to do this? No, but it’s never going to be a good time to rip off the Band-Aid,” Martwick said. “This is about protecting the taxpayers and making it transparent and forcing the city to confront the true nature of the pension problem.”
The police COLA issue will also eventually need to be addressed, Martwick said.
“This is the poster child” of what’s wrong with Illinois’ pension system, said Richard Ciccarone, president of Merritt Research Services. “It’s fiscally irresponsible. It’s ill timed. The city can’t afford this proposal and it’s going to be a long time before it can afford it.
“Adding incremental burdens is what got Chicago and other governments into pension trouble. This process should be stopped. It sends the wrong signal to the credit markets" that there’s a lack of fiscal discipline here, Ciccarone said.
The latest actuarially reports reviewed by the legislature’s Commission on Government Forecasting and Accountability put the overall statewide tab of unfunded pension liabilities around
That figure includes the state’s fiscal 2020 figure of $141 billion, the Chicago area and statewide municipal employees fund totals of $56.1 billion based on 2018 results, and the downstate and suburban public safety funds' $11 billion burden based on 2017 results. The latter two figures don’t take into account more recent results released by local governments. Chicago's
A big fix is needed, Msall says. In the absence of a state takeover, more consolidation of funds extending beyond administration and investments would help. Martwick agreed and said he hopes to take a deep dive into various measures in his committee.
The federation has long advocated that the state put a constitutional amendment on the ballot asking voters to ease language that currently bars any impairment or diminishment of promised benefits. The federation supports then trimming automatic COLAs to bring them in line with inflation. Opponents of such a measure, including Pritzker, say even if approved any cuts would face a legal battle.
“We desperately need a comprehensive approach,” Msall said. And that means COLA changes, other reforms, and new revenue. “We all have to sacrifice.”
Chicago’s former mayor pitched a $10 billion pension obligation bond borrowing. Lightfoot rejected that plan but the city’s chief financial officer says pension borrowing is on the table if it’s accompanied by funding and policy reforms.
Pritzker previously pitched a state POB along with a series of other pension measures that included pushing off the current 2055 amortization schedule. He dropped the two items after April 2019 tax revenue came in better than expected. A state task force is exploring the use of asset sales to better fund the pension system.
Pritzker’s proposal to consolidate the administration and investments of more than 600 local public safety funds outside Chicago to save costs was accomplished in 2019. Local governments outside Chicago and Cook County participate in the well-funded Illinois Municipal Retirement Fund for general employees.
At least eight Illinois municipalities have used POBs since 2016 including Berwyn, Freeport, Granite City, Winnebago, McHenry, Rantoul, Round Lake Park, and Milan, according to Lisa Washburn, chief credit officer and a managing director at Municipal Market Analytics.
While MMA has softened on deficit financings to manage the pandemic, “our disdain for POBs remains intact,” Washburn wrote in a recent weekly outlook. “These financings cloak the passing on of more risk and volatility to future administrations and taxpayers should the arbitrage gamble fail to produce the desired results.”
A number of proposals could receive consideration during the General Assembly’s spring session. The Illinois Municipal League’s
“Municipalities are experiencing unprecedented budget shortfalls as a result of the current public health emergency,” the IML writes. “Reamortization of downstate public safety pension funds will statutorily place them in line with other funds and help ensure municipalities are better-equipped to continue their obligation to adequately fund retirements for public safety personnel.”
Legislation accomplishing that goal includes HB 5799 and SB 4000.
“I’ve always been opposed to kicking the can down the road, but we are in different times and have to evaluate some of these proposals,” said Harvey attorney and former Chicago alderman Robert Fioretti. Harvey was sued by its public safety funds to adhere to actuarial payments. “I think it should be looked at but with a skeptical eye. Without true pension reforms everything has to be on the table.”
