The Week in Public Finance: Court Strikes Down Chicago Pension Reforms, Pennsylvania Ends Budget Standoff and More

A roundup of money (and other) news governments can use.
by | March 24, 2016

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What Will Chicago Do Now?

The Illinois Supreme Court on Thursday ruled unconstitutional Chicago’s attempt to reduce its massive pension liabilities.

The decision, which affirms lower court rulings, doesn't come as a big surprise given that the state's highest court issued a similar ruling 10 months ago regarding Illinois’ proposed pension cuts. Still, it’s a blow to Chicago and its mayor, Rahm Emanuel, who had hoped the cuts would save the city hundreds of millions of dollars. Chicago is short $20 billion across five pension plans (including public schools), and the poor financial health of the retirement system has resulted in downgrades from credit ratings agencies.

The law struck down by the court targeted two of the city's pension funds, which account for about $8 billion of its liabilities. The proposed reforms would have increased workers’ contributions into those pension funds and reduced cost-of-living adjustments for retirees. But those reductions, the court said, amounted to diminishing pension benefits, which is prohibited in the state constitution’s pension protection clause.

The ruling could impact the city’s access to the credit market. Moody’s Investors Service already downgraded Chicago's credit to junk status after the high court struck down Illinois’ pension changes last year, saying the ruling indicated that Chicago would face limited options for reducing its debt. Other ratings agencies have also downgraded Chicago but stopped short of rating it at junk. Those agencies generally cited the city’s budget woes for the downgrade, holding off -- for then, at least -- on mention of its pension litigation.

Moody’s said Thursday it would be closely watching the city for its response.

“Relative to revenue, Chicago’s unfunded pension liabilities are among the highest of any municipality Moody’s rates,” said Matt Butler, a Moody’s assistant vice president. “Absent substantial budgetary adjustments, Chicago’s pension debt will grow for many years and, along with the court invalidating the savings achieved with the city’s reform, will continue to drive the city’s fixed costs higher.”

Pennsylvania (Begrudgingly) Has a Deal!

With fewer than 100 days until the 2016 fiscal year is over, Pennsylvania finally has a working budget for its remainder. This week, Gov. Tom Wolf, who had previously threatened to veto the legislature's budget, said he would allow it to become law without his signature.

Wolf has fought for the past year with the Republican-led legislature that refused his calls to raise taxes to cover the state's growing expenses, including mounting pension debt.

The news comes at the great relief of public schools, which were considering closing early for the summer if the state couldn't free up funding for them through the end of the school year. The bill adopted by the legislature provides about $6 billion in state funding for schools, which is only $400 million short of what Wolf wanted.

But that’s about the only reason to celebrate.

Although most states are legally required to pass a balanced budget, Wolf argues this one isn't truly balanced because it doesn't fix Pennsylvania’s long-standing structural problems. For example, it includes a 3 percent increase in total spending but uses one-time fixes to pay for that.

That means that Pennsylvania is no better off than it was a year ago when credit agencies warned lawmakers they needed to fix the state’s structural deficit. Now they have the budget for the 2017 fiscal year before them, which starts July 1, and will be debating the same issues they failed to agree upon for the last budget. Only time will tell if history repeats itself.

In the meantime, the state's AA-minus rating, which is the third-lowest credit rating among states, is still likely at risk.

“There is nothing that has occurred in recent weeks or months that leads us to believe the spending plan will begin to put Pennsylvania back on a path to structural balance,” wrote Tom Kozlik, an analyst at PNC Bank, in his commentary emailed to subscribers this week. “We do not expect the budget to come close to solving Pennsylvania’s fiscal pressures.”

There's still one state left that has yet to finalize a budget for FY 2016, and that's Illinois.

Vape Much?

An analysis released this week about smokeless tobacco products concluded that because so-called vapor products aren’t nearly as bad for your health as real cigarettes, the tax on them should be lower or nonexistent.

“Punitive taxes on vapor products,” said the nonpartisan Tax Foundation, “could inadvertently close out options for cigarette users looking to quit.”

In its analysis, the Tax Foundation notes a number of studies that have shown that vapor products, which contain tobacco in liquid form, are far less harmful than smoking cigarettes. For instance, Public Health England found that electronic cigarettes are 95 percent less harmful than regular cigarettes and can serve as an effective way to quit smoking. Some in the medical community, though, worry that e-cigarettes will attract teens who will then turn to smoking.

Electronic cigarettes and other such products started out in obscure shopping mall kiosks or on online specialty sites but have recently exploded in popularity. It was billed as a safe way to quit smoking. But many users have instead simply switched from smoking cigarettes to what's now called "vaping."

Because of that, it's been tempting for states to target vapor products the same way they've targeted cigarettes by raising taxes as a way to discourage people from taking up or continuing the habit. Last year, 23 states considered a tax on vapor products, according to the Tax Foundation. But just four states, the District of Columbia, and three local jurisdictions actually levy a tax.