A Wall Street rating agency that alone gave Chicago a junk bond rating on Friday branded as “credit negative” a bill Gov. J.B. Pritzker signed over Mayor Lori Lightfoot’s objections boosting pensions for thousands of Chicago firefighters.
“The legislation is credit negative for the city of Chicago,” said the advisory from Moody’s Investors Service, “because it will cause the city’s reported unfunded pension liabilities, and thus its annual contribution requirements, to rise.”
With pension contributions consuming 17% of the city’s operating revenue and total liabilities pegged at $46.6 billion in 2019, pensions are the “largest credit challenge facing Chicago,” Moody’s said.
Pritzker signed the bill on Monday, arguing the new law “creates a system that gives all firefighters certainty and fair treatment.” But Lightfoot, who had urged the fellow Democrat not to sign it, blasted it as a “fiscally irresponsible” law typical of Springfield’s “back room deals.”
Moody’s on Friday gave Lightfoot more ammunition.
Governors who veto bills that pass with veto-proof majorities tend to get rolled. It would also have helped if the mayor had convinced at least one Senator from the city’s delegation to vote “No” back in January. But the mayor was apparently very angry…
* Moody’s did have other things to say about the new law…
House Bill 2451 eliminates a formula based on birth date that provided lower pension COLAs to certain retired firefighters. As a result of the new law, all retirees that are considered “Tier 1” members of the FABF will now receive a 3% COLA annually on their pension, with no cumulative cap. Before House Bill 2451, retired firefighters in Tier 1 would have received a 1.5% COLA, subject to a 30% cumulative cap, if born on or after January 1, 1966. Members of the FABF receive Tier 1 benefits if hired before January 1, 2011, while those hired on or after January 1, 2011 receive less generous Tier 2 pension benefits.
One potentially advantageous effect of House Bill 2451 is that it forces immediate recognition of 3% COLAs for Tier 1 members. The state law governing Chicago firefighter pension COLAs has been amended on several occasions in the past to alter the birth date that would determine eligibility of a Tier 1 retiree for a 3% COLA versus a 1.5% COLA. The most recent such change occurred in 2016, when the law was updated to provide a 3% COLA to all Tier 1 firefighters born before January 1, 1966, compared to January 1, 1955, before the change. That change, in addition to several other provisions, triggered a roughly $227 million (4.5%) increase to the actuarial accrued liability reported by the FABF as of the December 2016 actuarial snapshot.
Since increases to benefit provisions generate new unfunded liabilities that must be amortized over time, shifting to 3% COLAs with periodic changes to state law would produce a more backloaded contribution pattern for the city, compared with an immediate recognition of the higher benefit levels. That said, now with House Bill 2451 signed into law, the flexibility to forego expanding the number of Tier 1 firefighters receiving 3% COLAs is no longer available. Whether the state will enact similar legislation for any of Chicago’s other retirement systems is uncertain. For example, the law governing the city’s retirement system for police officers contains similar birth date related COLA distinctions.
* From Pritzker’s press release…
Building on efforts to protect Illinois’ first responders and frontline workers, Governor JB Pritzker today signed legislation that codifies longstanding benefits in the Chicago firefighter pensions system. House Bill 2451 ensures firefighters are treated fairly by fulfilling promises made to firefighter pensioners.
“I’ve always believed that hardworking men and women who have earned their pension shouldn’t pay the price for local or state budget challenges,” said Governor JB Pritzker. “HB 2451 creates a system that gives all firefighters certainty and fair treatment. And to make sure that the city can meet its obligations, my administration is working to sell the James R. Thompson Center, which will return to the city’s property tax rolls and is projected to generate $45 million annually for the city and its sister agencies.”
“By signing this bill, Gov. Pritzker has once again demonstrated his commitment to fiscal responsibility and protecting future generations of middle class Chicagoans from massive tax increases,” said State Senator Robert Martwick (D-Chicago). “If we ever hope to right our financial ship, we must finally put an end to the irresponsible behavior that put us here in the first place. This law simply ensures that the city confronts the true costs of its pension obligations and makes the difficult decisions it needs to make today.”
HB 2451 addresses disparate pension benefits among Chicago firefighters. Currently, employees eligible for a pension in the Firemen’s Annuity and Benefit Fund of Chicago (FABF) who were born after January 1, 1966 are granted a 1.5 percent COLA. However, firefighters who may have started on the force the same day, may unfairly receive different benefits based on their dates of birth. The legislation addresses this discrepancy by adjusting the COLA for these firefighters from 1.5 percent to 3 percent.
The legislation eliminates the 30 percent cap on cumulative COLA adjustments. For employees eligible for a 1.5 percent COLA, they would have hit the cap at 20 years. The reforms made in this legislation provides firefighters the ability to plan for themselves and their families.
HB 2451 is effective immediately.