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Rahm Emanuel's Pension Plan Won't Address Serious Problems

The governor of Illinois has called the Chicago proposal a "kick-the-can-down-the-road" approach.

By Hal Dardick

There's a key provision in Mayor Rahm Emanuel's police and fire pension fix buried in the fine print and another that's gone largely undiscussed: The plan puts off one big increase in city payments until the mayor may well be out of office, and it doesn't cut benefits at all.

Both of those factors make it more politically difficult for Republican Gov. Bruce Rauner to sign Emanuel's bill into law. The governor has called the mayor's proposal a "kick-the-can-down-the-road" approach, and he also prefers that pension reform measures cut costs at the expense of government workers.

That adds to what's already a gaping hole in Emanuel's pension solution -- he would pay for it through a new, city-owned casino that has not been approved and would not cover the entire cost.

The stakes are high for Emanuel, who is trying to rescue the city's credit rating from junk status and recently was forced to pay at least $70 million more in interest when the city borrowed money as part of the mayor's debt restructuring plan.

Without help from Springfield, Emanuel faces a $538 million increase in police and fire pension costs next year, according to the city's latest estimates. That's equal to about one-sixth of the entire city operating budget.

The bill lawmakers quickly approved at the end of May aims to provide short-term financial relief while putting the two vastly underfunded pension funds on solid ground.

Instead of paying the additional $538 million, the city would put in $319 million more next year. That's still a big increase, but it doesn't carry quite the shock. For the next four years, the city would have to come up with smaller increases ranging from $32 million to $65 million.

But Emanuel's plan also includes another big hit. In 2021 -- two years after Emanuel's current term ends -- whoever is mayor of Chicago will have to come up with an additional $137 million for police and fire pensions.

That pushes off further tough decisions about taxes and spending cuts until well after the next city election in 2019. All told, during the rest of Emanuel's second term, city payments to the police and fire funds would increase by about $1.6 billion. That's $713 million less than under current law.

In addition, the mayor wants to stretch out the city's payment plan, taking 40 years instead of 25 years to grow pension fund balances to 90 percent of what's needed to pay future benefits.

If those tactics sound familiar, it's because they're similar to what got both city and state government into their pension messes in the first place: delaying payments and extending them over a longer period of time, pushing up the overall cost over time.

"It repeats sort of the sins of the past," said Ralph Martire, executive director of the Center for Budget and Tax Accountability. "It's the same thing that currently exists for the city pension system, and it's the same thing that is starving the state's resources right now, and that is a very back-loaded ramp that continues underfunding pensions the first few years, making the long-term resolution more difficult because of compounding interest. . . . This truly is a deferral of the problem down the road."

Martire said that to avoid the problem of payments spiking again in the future, the city must take only one or two years to attain a steady level of funding.

"That's what they've got to do, and that's not what they did," said Martire, who added it's reasonable for Emanuel to take longer to reach 90 percent funding considering the city's need to maintain essential services like police and fire protection and road maintenance.

But actuaries, the professionals who determine how to handle pension funding costs over a long period, frown on taking 40 years to reach adequate funding, which they also often define as 100 percent, not 90 percent.

"People who aren't born yet will be paying the cost of people who've already died," said Mitchell Serota, a Skokie-based actuary, after hearing a description of Emanuel's proposed changes.

No cost-cutting

The police and fire pension bill that surfaced in the waning days of the General Assembly's spring session was quite different from what Emanuel campaigned on. Before the April 7 election, Emanuel talked about the need for "reform and revenue" as the key ingredients to any pension solution. The "reform" portion in the mayor's previous pension measure covering city workers and laborers reduced retirement benefits.

Emanuel even criticized challenger Jesus "Chuy" Garcia for failing to include cost-saving measures when the issue of pension changes came up. Garcia's counter to Emanuel's argument proved prescient.

"Reform is important, but it's also important to understand the solution the mayor has put forth is before the Illinois Supreme Court," Garcia said during a March 16 debate. "I think it's unconstitutional. I think the court will find as such, and we'll be back to square one."

That's exactly what happened May 8. The court tossed out a state pension law that sought to cut employee benefits, citing a provision in the Illinois Constitution that prohibits such reductions once the perks are granted. That ruling put in jeopardy the mayor's previous law covering the pensions of city workers and laborers.

And so with the court limiting his options, Emanuel's latest pension proposal does not contain the cost-cutting reforms the mayor has long talked about and instead seeks to simply pay what the city owes. The Fraternal Order of Police and the Chicago Fire Fighters Union are on board.

Though Emanuel's pension bill sailed through the legislature, it has yet to land on the governor's desk. Democrats who run the House and Senate are holding off on sending the measure to Rauner amid what's shaping up to be a long summer of brinkmanship over the state budget, Chicago tax relief and Rauner's so-called turnaround agenda.

As both sides posture, Rauner last week criticized Emanuel's plan as "a kick-the-can-down-the-road pension bill." Nevertheless, Rauner stopped short of saying he'd veto the measure, an indication it might just another be part of the political chess game playing out.

Rauner also told WBEZ (91.5 FM) radio that he wanted to meet with legislative leaders and Emanuel to talk about "true structural change to the pensions that are fair to employees but also more affordable to taxpayers."

The mayor later defended how he's attacking the police and fire pension issue.

"Back in 2010, when police and fire were dealt with in (previous) legislation . . . it mandated tripling the payments," Emanuel said during a recent news conference. "This doubles the payments from where they are, so I wouldn't call that kicking the can. . . And it does it in a way that synchronizes the timeline with other funds across the state. And I also believe firmly this notion is to do it in a reasonable way and a responsible way that doesn't unfairly burden taxpayers."

Taxpayers would still be paying what the city owes, just over a longer period of time and at an overall higher cost. After the second big bite of a $137 million increase in 2021, pension costs would level off to a relatively modest $28 million more each year -- in part because the city is taking longer to reach the 90 percent funding threshold. The Emanuel administration declined to provide a list of the 40-year payment schedule, however.

Wall Street will be watching to see what Rauner does with Emanuel's pension bill.

"This makes the short-term challenge easier at the expense of making the long-term challenge harder," said Matt Fabian, a managing partner at the municipal bond research firm Municipal Market Analytics. "It's not the ideal solution that rating agencies or investors want."

Chicago Tribune's Heather Gillers contributed.

(c)2015 the Chicago Tribune

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