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

Illinois

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.

[…]

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

chicago

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.

[…]

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.

[…]

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

Former Enron Trader Continues to Fund Pension Policy Reforms From Behind the Scenes

one dollar bill

Former Enron trader John Arnold has given large amounts of money to various public pension reform initiatives around the county in recent years.

Many of those measures mandate a shift to a 401(k)-style system, or allow benefit cuts.

Most recently, he gave $1 million in support of Proposition 487, a Phoenix ballot measure that would have shifted new city hires into a 401(k)-style system.

From Politico:

When former Enron trader and Texas billionaire John Arnold donated more than $1 million to a November 2014 initiative to reform the public pension system in Phoenix, Ariz., pension activists took notice.

Arnold’s donation to Proposition 487, also known as the Phoenix Pension Reform Act, constituted close to 75 percent of total donations for the ballot measure, which failed. Had it passed, it would have moved new state employees from a defined benefit plan into a less-generous (and less expensive) defined contribution plan such as a 401(k).

Despite his Arizona defeat, no one believes Arnold is done.

Arnold’s money has also been involved in reform initiatives in Kentucky, Rhode Island and California. From Politico:

In the 2014 cycle, Arnold and his wife donated $200,000 to a super PAC that supported Democrat Gina Raimondo’s successful gubernatorial campaign in Rhode Island. As Rhode Island’s state treasurer, Raimondo had enacted pension benefit cuts that cost her union support. Rahm Emanuel, who made similar changes to Chicago’s pension system, also received financial assistance from Arnold.

San Jose Mayor Chuck Reed, another Democrat, tried, unsuccessfully, to place an initiative on California’s November 2014 state ballot that would have allowed public employers, under specific circumstances, to reduce employee benefits and to increase contributions to underfunded plans. Arnold bankrolled the entire effort, to the tune of $200,000.

According to data compiled by the NPPC, based on donations disclosed on the website of the Laura and John Arnold Foundation and on news articles, Arnold has since 2008 spent more than $53 million on pension policy reforms, not all of it in the political realm. (In an email interview with Reuters, Arnold disputed those numbers.)

Other beneficiaries listed include universities and think tanks such as Brookings and the Pew Research Center. Much of the money was spent to support pension reforms, but some was spent on education reform. Both efforts, unions point out, tend to favor benefit cuts to public employees.

[…]

The Arnold Foundation is also participating in the Colorado Pension Project, chaired by former Colorado governors Bill Owens, a Republican, and Richard Lamm, a Democrat. As governor, Lamm drew national headlines 30 years ago when he said that elderly people who were terminally ill had a “duty to die and get out of the way.” (Lamm will turn 80 next year.) The Colorado Pension Project’s website says that recent legislative reforms to the state pension system — which reduced cost of living adjustments, raised the retirement age for new employees and increased employee salary contributions — did not go far enough. McGee said Arnold’s foundation was drawn to the state’s history of “fruitful left ideological discussions.”

Read the full Politico report here.

 

Photo by c_ambler via Flickr CC License

Second Lawsuit Filed Against Chicago Pension Changes

chicago

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.

[…]

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

[…]

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

Rahm Emanuel

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

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.

 

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

Rahm Emanuel in Oval Office

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.

[…]

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.

Three New Tax Hikes in Chicago As Emanuel Looks For Revenue To Pay Down Pension Debt

Rahm Emanuel Oval Office Barack Obama

Chicago Mayor Rahm Emanuel is leaving no stone unturned in his search for revenue sources that could help pay down the city’s unfunded pension liabilities, which total over $25 billion.

Complicating the search is the upcoming election; Emanuel has said he will not touch property, sales or fuel taxes, all of which are politically unpopular.

In the past year, Emanuel has increased the “telephone tax” and cigarette taxes. This week, he added three more tax hikes to the list. From the Chicago Tribune:

Mayor Rahm Emanuel plans to raise taxes on drivers who park in garages, those who own luxury skyboxes at Chicago stadiums and companies that try to avoid city taxes by making purchases in the suburbs to balance next year’s budget, aides said Monday.

The three tax hikes would net the city $31.4 million as the mayor seeks to close an estimated $297.3 million budget gap without raising property, sales or gas taxes ahead of the Feb. 24 city election, when Emanuel will ask voters to give him a second term.

Under Emanuel’s plan, the tax on parking in public lots would rise 2 percentage points, to 22 percent on weekdays and 20 percent on weekends. The city expects to collect $10 million from the increase in 2015, mayoral spokeswoman Kelley Quinn said.

As part of his first budget, Emanuel added a $2-a-day fee on cars parked in public lots on weekdays. And in 2013, Emanuel pushed through the City Council a switch from a flat parking tax of $5 to a percentage parking tax, which the mayor said would cost more for parkers in “premium” garages like those at hotels but potentially lower costs for people parking in economy garages.

The city estimates it would make $4.4 million by ending a 1995 “amusement tax exemption” on the cost of renting skybox suites at sporting events and concerts.

And the Emanuel administration says $17 million would flow into the city’s coffers next year by closing a loophole in the use tax charged to Chicago businesses that buy certain goods outside the city.

A breakdown of the city’s unfunded pension liabilities by system, from the City of Chicago website (data from 2012):

Municipal Employees’ Annuity & Benefit Fund of Chicago (MEABF): $8.2 billion

Laborers’ & Retirement Board Employees’ Annuity & Benefit Fund (LABF): $0.9 billion

Policemen’s Annuity & Benefit Fund (PABF): $7.0 billion

Firemen’s Annuity & Benefit Fund (FABF): $3.1 billion

Chicago Teachers Pension Fund (CTPF): $7.1 billion

Park Employees Annuity and Benefit Fund (PEABF): $0.4 billion

Chicago’s Pension Hole Gets Deeper

Rahm Emanuel Oval Office Barack Obama

A new report from the watchdog group Civic Federation reveals that Chicago’s unfunded pension obligations have tripled since 2003 and now stand at $37 billion.

Details from the report, summarized by the Chicago Sun-Times:

The report found the gap between current assets of the ten funds and pensions promised to retirees had risen to $37.3 billion.

The 10 funds had an average funding level of 45.5 percent in 2012, down from 74.5 percent a decade ago.

The firefighters pension fund is in the worst shape, with assets to cover just 24.4 percent of future liabilities. The CTA pension fund is in the best financial condition at 59 percent.

Government employees did their part by contributing the required portion of their paychecks to their future pensions. But the government contribution fell nearly $2 billion short of the $2.8 billion required to cover costs and reduce a portion of unfunded liabilities over a 30-year time frame, the report concludes.

Investment income didn’t help. And the future outlook is bleak, thanks to a “declining ratio” of active employees to beneficiaries.

In 2012, the 10 funds had 1.11 active employees for every retiree, down from a 1.55 ratio a decade ago. The police, laborers, Metropolitan Water Reclamation District, Forest Preserve and CTA funds all had more beneficiaries than active employees in 2012.

Counting statewide funds, the pension liability amounts to $19,579 for every Chicago resident.

Chicago is required by law to make a $550 million contribution in 2016 to two police and fire pension funds. Mayor Rahm Emanuel presumably needs to raise that money through various taxes. But he has repeatedly promised not to raise property taxes, and more recently said he won’t raise gas or sales taxes, either. From the Sun-Times:

Mayor Rahm Emanuel on Wednesday ruled out pre-election increases in property, sales or gasoline taxes but pointedly refused to say whether he would steer clear of any other taxes, fines or fees.

“We’ve balanced three budgets in a row holding the line on property, sales and gas taxes and finding efficiencies and reforms in the system. . . . We eliminated the per-employee head tax . . . and we put money back in the rainy day fund,” the mayor said.

“On my fourth budget, we will hold the line on property, sales and gas taxes and put money back in the rainy day fund and continue to look at the system as a whole to find efficiencies and reforms and things that were duplicative where you could do better.”

This past summer, Chicago hiked its telephone tax by 56 percent.

 

Photo: Pete Souza [Public domain], via Wikimedia Commons

Emanuel Draws Flak For Retiree Premium Increase

Rahm Emanuel Oval Office Barack Obama

Chicago Mayor Rahm Emanuel increased retiree health premiums by 40 percent this week, and it didn’t take long for his challenger, Bob Fioretti, to criticize the decision. Fioretti, currently an alderman, told the Sun-Times:

“This will place an unsustainable financial burden on our retirees, who are already facing cuts to their pensions,” the 2nd Ward alderman said.

“Our retirees dedicated their lives to making our city work. How does this administration repay them? By breaking its promises and pushing struggling Chicagoans closer to poverty. It’s unconscionable at a time when we should be looking to build our [economy] from the middle out and lifting up our working families.”

Fioretti was asked where he would find the $27 million that Emanuel hopes to save in the city’s 2015 budget by continuing to phase out Chicago’s 55 percent subsidy for retiree health care.

“A lot of this they’ve known was coming down the road for a long time. It’s long-term bad planning. We should work to find ways to fund the promises we made,” he said.

“There are ways — whether it’s looking at a [1 percent] commuter tax [or] complete reform of TIFs — all of those are the real tough decisions we have to make to move this city forward. Those are solutions my administration will find.”

The city defended the premium increase as a fiscal necessity. From the Sun-Times:

Budget and Management spokesman Carl Gutierrez has called the increase “part of our efforts to right the city’s financial ship” and save Chicago taxpayers $27 million in 2015.

“For pre-Medicare retirees, there will be an additional reduction in their subsidy by only 25 percent, and the city is offering four plans to provide them with options for health care and to reduce their costs, including an option that would reduce their premiums,” he wrote in an email.

Bob Fioretti is running against Emanuel in Chicago’s mayoral race. Emanuel’s other main challenger, Karen Lewis, has not yet commented on the premium hike.

Photo by Pete Souza