Chicago's Mayor Has a Tough Plan to Fix the City's Pension System
Rahm Emanuel would hike property taxes and cut pension benefits.
By Hal Dardick and Bill Ruthhart
Mayor Rahm Emanuel is proposing to raise property taxes and cut retirement benefits for some city workers to start digging out of a massive pension debt he inherited.
But the proposal the mayor and his top aides outlined late Monday would not address huge pension shortfalls for Chicago police, firefighters and teachers. Nor would it deal with the city's most immediate, pressing financial problem: a state requirement to pay a whopping $600 million more toward police and fire pensions next year, a provision that could lead to a combination of tax increases, service cuts and borrowing.
Even as Emanuel vowed to put his pension proposal on paper in the coming days so it can be considered by state lawmakers, the changes face an uncertain future. Although Emanuel aides say the proposal comes out of talks with more than 30 city unions, not all of them are on board. A lawsuit is all but certain, especially after one group of unions issued a statement calling Emanuel's concept "an unconstitutional approach that makes onerous cuts to the pension benefits of nearly 50,000 active and retired public servants."
The mayor said his pension proposal should send a signal to reluctant police and fire unions that "there's common ground and a consensus" with what he said was a majority of the other unions involved.
"If you come into the office (and ask), 'How do we solve this problem, not how do we assign blame, but how do we work together to solve this problem,' I'm going to work extra hours to find common ground," Emanuel said. "If you're not looking to assign blame, if you're actually looking to solve it, you're going to have a partner, 24-7 ... 365 days a year to try to find out how to get an agreement and reach an understanding."
But the police union is sticking to its opposition, with a spokesman saying the city is trying to take too much from employees and retirees after it failed to put enough into the pension funds to keep them healthy.
"They are making the same promise they made in the past. ... It's like, 'Let's continue to kick that can down the road, because that's what we've done in the past, and that's what we are going to continue to do," Fraternal Order of Police spokesman Pat Camden said.
The mayor's proposal involves both taxpayers and city workers paying more. Under the proposal, the owner of a $250,000 home would pay $50 more a year starting in 2016. After five years, the homeowner would be paying an extra $250 a year.
That tax hike is on top of the property tax increases the mayor has enacted at Chicago Public Schools. The new money also would not solve the police and fire pension problem, which could require its own tax increase if Emanuel does not get an extension or other relief from lawmakers this year.
City workers also would pay 2.5 percent more toward their retirement, increasing their contributions by 0.5 percent a year for five years. Employees now pay 8.5 percent of their salary each year for pensions and would ultimately pay 11 percent. The increase would amount to about $1,500 more a year by 2019 for a city worker making about $60,000.
In addition, City Hall would change how it awards cost-of-living increases to city workers. Instead of 3 percent yearly bumps that are compounded, the city would provide increases at the lower of 3 percent or at half the level of inflation, not compounded. In addition, annual pension bumps would not be given in 2017, 2019 and 2025, and there would be a two-year delay in starting the hikes upon retirement.
The city would pay billions of dollars more into the pension system over four decades, with about half of that coming from property taxes. The rest would come from airport and water and sewer fees, savings from cuts to retiree health care and other unspecified budget cuts.
The idea is to eliminate about half of the $19.5 billion City Hall pension debt over 40 years. The city's pension funds don't have enough money to stay solvent in the coming decades in large part because the state formula governing city contributions did not require the city to pay in enough money to keep the promises made to employees.
"I've always said there was going to be reforms and revenues, they were going to pair," Emanuel said. "If everybody gives something, then nobody had to give everything. ... We're making changes collectively, but I think it achieves everybody's objective and goal."
Absent the changes, the municipal fund, which serves more employees and retirees than the other three city pension funds combined, would become insolvent in 2027, Emanuel said. The much smaller laborers fund would go broke in 2031, he added.
"The risk of not dealing with it -- meaning huge property taxes or huge pink slips with huge service cuts -- was a totally unacceptable risk," Emanuel said. "This is much better, giving people the certainty they deserve."
While the mayor said he had significant union support, the Service Employees International Union, which represents many of the workers who would be affected by the plan, did not respond to requests for comment Monday night.
The We Are One Chicago union coalition, which includes some of the affected labor organizations, criticized the plan for "raiding the retirement savings of retirees and average working people."
"The city's proposal is an unconstitutional approach that makes onerous cuts to the pension benefits of nearly 50,000 active and retired public servants," the coalition said in a statement. "These cuts are all the more devastating considering that these cafeteria workers, librarians, health care employees, food and water safety inspectors, nurses and others do not receive any Social Security benefits."
The coalition contended that many retirees would lose so much ground under Emanuel's plan that they would be pushed toward near-poverty income levels. An employee retiring in 2015 with a $33,500 pension would see the value of that pension fall to $22,700, the union said.
Laurence Msall, president of the Civic Federation, a nonpartisan budget watchdog group that has long called for change to city pension plans, said he had been briefed but not seen full details. Ideally, Msall said, the proposal would have the pension system 100 percent funded within 30 years.
"The mayor's approach balances in a reasonable way the interests of the employees, the taxpayers, the need for continuing funding of government services and protects the basics of the defined benefit plan," Msall said. "So, it's far from a perfect solution, but it is a far better plan than exists right now for those pension funds in the city of Chicago."
But Msall also warned that the proposed changes would do nothing to resolve the looming increases the city must pay into its police and fire pensions. The $600 million required amounts to about one-fifth of the city's operating budget.
"This is one step in an important effort that has to continue," Msall said. "I think this has the potential to show the city of Chicago is serious and the mayor is serious about addressing the pension crisis that exists among all the funds."
The Emanuel proposal is similar to the state pension law approved in December in that it would scale back the size of and even skip some annual cost-of-living increases. There are differences, however: While Emanuel would require city workers to pay more toward their retirements, the state law slightly reduces the amount workers have to pay. And where the state law generally raises retirement ages, Emanuel's proposal would keep it the same or lower it.
The changes would have to be approved by state lawmakers and the governor. A bill that could carry Emanuel's proposal took a procedural step forward Monday, putting it into position for potentially quick action.
Tribune reporter Ray Long contributed from Springfield.
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