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Illinois Gov. Rauner Proposes Bankruptcy As Strategy for Taming Municipal Pension Debt

Illinois Gov. Bruce Rauner didn’t touch on pensions during his State of the State address this week.

But in a list of policy proposals handed out to lawmakers, Rauner suggested giving municipalities the power to file for bankruptcy as a way to tame pension debt.

Even if towns and cities didn’t act, the threat of bankruptcy could give them leverage in pension negotiations with workers.

From the Chicago Tribune:

Gov. Bruce Rauner wants to give cities, towns and counties the authority to file for bankruptcy protection, a move that could give local governments a stronger foothold when negotiating with local police and fire officials over costly pension obligations.

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Rauner aides would not elaborate on how it might work.

But the single sentence calling for the state to “extend to municipalities bankruptcy protections to help turn around struggling communities” mirrors a proposed law introduced last month by state Rep. Ron Sandack, R-Downers Grove. Sandack said his aim was to give cities more tools for getting their financial affairs in order, including a “level field” when negotiating over pensions.

Federal law only allows municipalities to file for bankruptcy with explicit permission from the state where they are located, said James Spiotto, a municipal bankruptcy expert and attorney who is managing director of Chicago-based Chapman Strategic Advisors.

Currently, only the Illinois Power Agency has been given such authority. It would take passage of a new state law to extend the authority to municipalities.

Chicago Mayor Rahm Emanuel was quick to dismiss the idea that the city would use such a tactic to lower its pension costs, according to the Tribune.

On Pensions, Chicago Mayoral Candidates Mum on Specifics

On Friday, Chicago’s five mayoral candidates debated in front of the Chicago Sun-Times Editorial Board, seeking the newspaper’s endorsement.

Pensions was among the first issues to come up – and while everyone agreed that Chicago’s pension debt needs to be tamed, the candidates were largely mum on specific ways to accomplish that goal aside from a few tax proposals.

From the Chicago Sun-Times:

You might think there would be no avoiding the issue that is sure to dominate the next mayor’s agenda.

Unfortunately, a lack of specifics from Mayor Rahm Emanuel has made it easier for the others to dodge as well.

The mayor couldn’t be budged from what I’ll call his “Trust Me” speech in which he recounts his track record on financial matters, which includes more responsible annual budgeting than his predecessors plus legislative deals that reduce pension benefits and increase pension contributions for some city employees and retirees.

With a great deal of prodding, Emanuel acknowledged he’s not ruling out a property tax increase to help bring down the city’s huge pension liability.

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Fioretti, who flatly rules out a property tax increase, is the only candidate ready to put alternative revenue sources on the table. His calls for a commuter tax and/or a financial transactions tax on Chicago’s trading exchanges undoubtedly have some populist appeal.

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At least Fioretti is willing to stick his neck out for something. Cook County Commissioner Jesus “Chuy” Garcia couldn’t have been more vague about what he has in mind, arguing there are still too many unknowns about the scope of the problem until the Illinois Supreme Court has ruled on pension reform legislation.

Garcia also said he opposes reducing pension benefits to current retirees, which was a key part of Emanuel’s pension legislation. That means Garcia would need to find even more revenue.

Chicago voters have just three more weeks to demand real answers.

Watch the video of the debate here.

Photo by bitsorf via Flickr CC License

Second Lawsuit Filed Against Chicago Pension Changes

A second lawsuit has been filed against Chicago, challenging the pension cuts passed by the state this year.

The pension changes raise contribution rates for employees and employers, and reduce COLAs. The changes apply to members of the Chicago Municipal Employees’ Annuity & Benefit Fund and Chicago Laborers’ Annuity & Benefit Fund.

From Reuters:

Litigation seeking to derail changes to Chicago public worker pensions on constitutional grounds ensnared a second city retirement system on Monday.

Attorney Clint Krislov said he filed a lawsuit in Cook County Circuit Court on behalf of members of the city’s pension fund for laborers. That lawsuit followed one filed Dec. 16 by a coalition of labor unions against Chicago’s municipal pension fund.

An Illinois law enacted earlier this year for the two funds requires higher worker contributions and limits cost-of-living increases for retirees. The lawsuits contend the law violates a prohibition in the Illinois Constitution against reducing public worker retirement benefits.

Cook County Associate Judge Rita Novak on Monday set a hearing on the unions’ motion for a temporary restraining order in the municipal fund case for Jan. 28 and 30.

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Like Illinois, Chicago is arguing that its so-called police powers to provide essential services to residents trump constitutional protections for pensions.

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Under the law that takes effect on Thursday, Chicago’s payments to its two funds increase over five years. Workers’ current contributions of 8.5 percent of earnings rise to 11 percent over five years. Instead of receiving an annual 3 percent cost-of-living increase, retirees will receive increases tied to inflation. The increases will be skipped in certain years.

Mayor Rahm Emanuel has warned that the funds face insolvency within nine to 17 years unless changes are made. The funding shortfall is $8.4 billion for the municipal system and $1 billion for the laborers system. Police and fire pensions were not affected by the law.

The Chicago Municipal Employees’ Annuity & Benefit Fund and Chicago Laborers’ Annuity & Benefit Fund manage a combined $6.7 billion in assets.

Photo by bitsorf via Flickr CC LIcense

Emanuel Confident Pension Plan Will Survive Lawsuit

Four unions on Tuesday filed a lawsuit challenging Chicago Mayor Rahm Emanuel’s plan to increase pension contributions for city employees and reduce COLAs.

But Emanuel said Thursday he thinks the plan will pass legal muster, in part because he worked with dozens of unions to formulate it.

From the Chicago Sun-Times:

Two days after four unions followed through on their threat to challenge the mayor’s plan, citing the same constitutional guarantee at the core of the state case, Emanuel argued that he had no choice but to raise employee contributions by 29 percent and sharply reduce cost-of-living benefits.

“We have to do the tough things, the necessary things so people can know that they’re gonna have a retirement, which they didn’t know before because we weren’t doing and they weren’t doing the tough, necessary things to get the pension systems right,” the mayor said.

“We are both preserving and protecting the pension and doing it in a responsible way that brings both reform and revenue together to solve the problem . . . They’re challenging it, but I know we took on the challenge of under-funded pensions and addressed it head-on in a responsible way.”

Emanuel has argued repeatedly that the Chicago pension reform bill is different from the state legislation because the city changes were negotiated with and agreed to by city unions.

On Thursday, he hammered away at that point.

“Twenty-eight of 31 unions agreed to work with us . . . and 11 of them stood up and said they don’t agree with the lawsuit,” the mayor said.

“I think we were actually preserving [their pensions]. And I know the union leaders who worked with us agree because that’s why they agreed to it.”

The four unions that filed the lawsuit: Teamsters Local 700, AFSCME Council 31, the Chicago Teachers Union, and the Illinois Nurses Association.

Photo by Pete Souza

Unions Sue Over Chicago Pension Cuts

Chicago unions and public employees filed a lawsuit Tuesday to block pension changes coming in 2015 that would reduce future COLA increases and require workers to pay more toward their retirement.

From the International Business Times:

The law in question is scheduled to take effect in the new year and will slash pension benefits for workers and retirees in Chicago’s Municipal Employees Annuity and Benefit Fund and Board of Trustees of the Municipal Employee’s Annuity and Benefit Fund, according to the lawsuit.

The lawsuit, filed in Cook County Circuit Court, argued Public Act 98-0641 violates a provision and “straightforward promise” in the Illinois Constitution that forbids the diminishment or impairment of public employee retirement benefits. The lawsuit stated that the pension reform law, which was enacted in June, unlawfully reduces pension benefits for the plaintiffs and all others who chose a public-service career.

“Unless this court strikes down and enjoins implementation of the Act, Plaintiffs and thousands of other current and retired City of Chicago and Chicago Board of Education employees will be harmed and the trust that all Illinois citizens place in the inviolability of their Constitution will be breached,” the lawsuit stated.

The plaintiffs, comprised of 12 current and former workers and four unions, requested the court declare Public Act 98-0641 entirely “unconstitutional, void and unenforceable.” Current retirees will suffer immediately, while the same “injustice” awaits current public workers when they retire, according to the lawsuit.

Chicago Mayor Rahm Emanuel said the law was created with the support of many unions and is both constitutional and necessary to ensure 61,000 city workers and retirees receive pensions. “Without this reform, these two funds will run out of money in just a matter of years, which is why we must defend this law to protect the future of our workers, retirees, and taxpayers,” Emanuel said in a statement.

At the end of 2012, the city’s six pension funds were collectively 50 percent funded.

Photo by bitsorf via Flickr CC LIcense

Chicago Prepares For Pension Payment Spike, Creates Account to Set Aside Funds

Chicago must pay an additional $565 million in payments to its police and fire pension fund by 2016 – a fiscal strain that hasn’t yet been budgeted for.

But the city has now taken a step towards acknowledging the looming payments, by opening up a separate account in which money will be set aside for the pension contributions.

From Crain’s Chicago:

The Emanuel administration will start setting set aside money next year in a newly segregated account for increased pension contributions for municipal employees and laborers who agreed to reforms enacted earlier this year.

The city’s increased contribution from general revenues will be set aside in the new account even though the pension payment isn’t due until 2016, according to an Emanuel spokeswoman. However, increased payments required for its police and fire pensions next year aren’t even in the budget as negotiations continue with union leaders.

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While it’s largely symbolic—the city must make the payments with or without a special fund setting them aside—it’s meant to highlight that the reforms are real and going into effect soon, even as the Illinois Supreme Court agreed Dec. 10 to expedite a case testing whether public worker pensions are totally protected by the Illinois Constitution.

While a segregated fund is a responsible thing to do, “it completely ignores the fiscal irresponsibility of not budgeting for police and fire pensions,” said Amanda Kass, research director at the Center for Tax and Budget Accountability in Chicago. “It sets up the potential for a huge fiscal nightmare” when about $565 million in additional payments for next year’s police and fire pension contributions are due in 2016.

Money for the fund will come from sources other than property taxes, including money freed up by an increased surcharge for 911 calls and miscellaneous small budget cuts, the spokeswoman said. Emanuel was forced to back off his original plan to finance the city’s increased contribution with a big hike in property taxes when Gov. Pat Quinn objected.

It was originally thought that a property tax hike would be the go-to method of revenue generation to raise money for the pension payments. But Emanuel has been adamant that property taxes won’t be raised.