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* Sun-Times…
On Wednesday, four unions — AFSCME Council 31, the Chicago Teachers Union, the Illinois Nurses Association and Teamsters Local 700 — urged Emanuel in a joint statement to drop the city’s court battle over his plan, given the state Supreme Court decision last week.
“We believe the Supreme Court’s ruling leaves no room for doubt that Chicago’s pension cuts also violate the plain language of the pension clause. In light of that decision and the city’s credit downgrade, we urge Mayor Emanuel to stop wasting time and money in a futile attempt to defend these unconstitutional cuts, and instead work with us to develop fair and constitutional solutions to funding city retirement plans,” the statement reads.
* John Schmidt begs to differ…
Chicago still has a winning argument: Its reforms do not “diminish or impair” pension benefits. That means the Illinois Constitution is not violated.
The reforms include some reductions in how future benefit increases are calculated, and they require modest increases to employee contributions. But they couple these changes with massive increases in the city’s contributions to the two funds — from $177 million in 2014 to an estimated $650 million in 2021.
The two pension funds were going broke. Twenty-eight of the 31 unions with members in these funds supported the plan because they recognized that in a few years their pension assets would be depleted and benefits would not be paid.
The city, for the first time, would be legally responsible for the funds’ liabilities. That’s a major change. Under state laws that established the pension funds, the obligation to pay benefits has always been on the funds themselves, not the city.
The city has had no obligation beyond a specified contribution to the funds each year. If the city paid its required contribution and the pension funds still went broke, the city had no legal obligation to step in and beneficiaries would receive pennies on the dollar.
Now the city has the obligation. Far from “diminishing or impairing” pension benefits, the city’s reform plan strengthens and protect benefits that were endangered.
But aren’t “reductions in how future benefit increases are calculated” a diminishment, even though they may have saved the funds from insolvency?
* The immediate pricetag…
Ralph Martire, director of the Center for Tax and Budget Accountability, said the latest downgrade to junk bond status will cost the city an additional $200 million to $300 million, on top of its existing budget deficit and employee pension fund shortfalls.
“It’s already looking at a deficit north of $250 to $300 million. Now pile on another couple hundred million – let’s be conservative – from the impact of the downgrade of the bond status. Now pile on the $550 million increase in pension funding that’s due this year, and you’re talking about a problem that’s collectively in excess of $1 billion, or a third of their budget for current services,” he said.
* And then there’s this monster…
Chicago may have to pay banks as much as $2.2 billion after Moody’s Investors Service dropped its credit rating to junk, deepening the fiscal crisis in the third-largest U.S. city.
The company’s decision Tuesday to cut Chicago’s $8.1 billion of general obligations two ranks to Ba1, one step below investment grade, allows banks to demand that the city repay debt early and exposes it to fees to end swaps contracts, Moody’s said in a statement. Mayor Rahm Emanuel plans to refinance $900 million of debt to reduce the penalties. […]
City officials may be able to persuade banks not to demand the penalties as long as Chicago can move ahead with its refinancing plan, said Johnson.
“I would guess that most of their counterparties would be fine letting them go,” he said. “If they end up not selling it, then that creates significantly more risk.”
Those big brains in the Daley administration really messed things up, didn’t they? But those swaps probably should’ve been renegotiated long ago.
*** UPDATE *** Press release…
Legislation sponsored by state Senator Daniel Biss (D – Evanston) seeks to shore up local pension funds by diverting state payments from an employer into the local pension fund when the employer fails to make the required pension contributions.
“Just as we must hold our state government accountable for pension contributions, so should we hold Illinois’ local governments accountable,” Sen. Biss said. “This legislation provides the enforcement mechanisms necessary to first encourage and then require the adequate funding of local pension funds.”
For decades, the Illinois Municipal Retirement Fund (IMRF) has had the ability to divert State payments to employers who failed to make their required pension payments. This is the main reason why IMRF is in excellent fiscal health, unlike so many other pension funds in Illinois. In recent years, police and fire pension funds and the Chicago municipal and laborer’s pension funds have acquired this power as well. Under House Bill 3484, the other local public pension funds, including those of the Chicago Public Schools, Cook County, and the Chicago Transit Authority, would be granted this ability.
“The history of pensions in Illinois makes one thing crystal clear: it is absolutely imperative that employers make adequate payments into the pension systems,” said Biss. “Last Friday’s Supreme Court ruling only serves to underscore the importance of this essential truth. Our legislation takes a major step to ensure that we will not repeat the mistakes of the past.”
House Bill 3484 passed out of committee today and now goes to the Senate floor for a vote.
* In other city-related budgetary news…
The CTA is already enacting contingency plans to absorb deep cuts in state funding sought by Gov. Bruce Rauner, the transit agency’s top finance official said Wednesday.
The CTA will erase from this year’s budget anticipated revenue of $21 million in state subsidies that would have helped the CTA to offset some of the cost of providing reduced fares and free rides to disabled riders and some senior citizens, Ron DeNard, CTA chief financial officer, told the CTA board at its monthly meeting.
The CTA received about $28 million in state funding last year for the reduced-fare and free-rides programs, which are mandated by state and federal laws.
Rauner is seeking to zero-out the state subsidy in fiscal 2016.
CTA President Forrest Claypool has said that the actual cost to the transit agency for the two programs exceeds $100 million a year in uncollected fares.
posted by Rich Miller
Wednesday, May 13, 15 @ 2:52 pm
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== the city had no legal obligation to step in ==
I don’t see the distinction between the funds and the city itself.
That would be like saying the State didn’t have to pay the pensions if the funds go broke … and the ISC has already dismissed that idea.
Comment by RNUG Wednesday, May 13, 15 @ 3:11 pm
Did Schmidt read the opinion? Did he read SB1? Apparently not because he’s factually wrong on at least 3 major points. The city pension law absolutely diminishes benefits by rolling back COLAs, just like the state law did. And the city law is not unique in mandating the city to dedicate additional cash to the funds as he claims, the state bill did that too. Finally, 28 of the city’s 31 unions did not support the bill. Most slipped “neutral”, a couple slipped in favor and a handful slipped against.
C’mon man!
Comment by Phil Wednesday, May 13, 15 @ 3:20 pm
From a downstate perspective it seems like the city should simply implement a city income tax. In Ohio, if you live or work in a participating municipality, you have to pay up to 2% as a city income tax.
Lots of Democrats seem to think that simply raising taxes is the easiest way out. Great! Chicago is run completely by Democrats. Start implementing income tax increases. If it’s good for the state, then it must work equally well in Democrat Chicago.
Comment by Downstate Wednesday, May 13, 15 @ 3:21 pm
===the city should simply implement a city income tax===
Tbe city can’t implement that. The state has to do it first.
Comment by Rich Miller Wednesday, May 13, 15 @ 3:22 pm
No matter how clearly the isc writes the pension ruling, it does not take the minds of men long to scheme for the next illegal idea. The reality of the isc ruling seems to be difficult for some to assemble into their world view.
Comment by Facts are stubborn things Wednesday, May 13, 15 @ 3:22 pm
The isc made it clear that benefits at the time of hire are protected.
Comment by Facts are stubborn things Wednesday, May 13, 15 @ 3:24 pm
Look homeward, Biss. One of the cities with mounting troubles is Evanston.
Comment by Under Further Review Wednesday, May 13, 15 @ 3:26 pm
==Under state laws that established the pension funds, the obligation to pay benefits has always been on the funds themselves, not the city.
The city has had no obligation beyond a specified contribution to the funds each year. If the city paid its required contribution and the pension funds still went broke, the city had no legal obligation to step in and beneficiaries would receive pennies on the dollar.==
Sidley and Austin made the same argument in its opinion for the Civic Committee about the states’ funds.
Comment by Anon. Wednesday, May 13, 15 @ 3:27 pm
When is a diminishment not a diminishment? I’m amazed that some of these lawyers can say things like there is no diminishment while you’re cutting a person’s benefits with a straight face.
Comment by Norseman Wednesday, May 13, 15 @ 3:29 pm
John Schmidt? Daley schill. Please, go away.
Comment by james the intolerant Wednesday, May 13, 15 @ 3:34 pm
Good PR move by the unions though to put the focus on Rahm wasting taxpayer money by continuing to fight a losing battle.
Comment by anon Wednesday, May 13, 15 @ 3:36 pm
==I don’t see the distinction between the funds and the city itself. ==
The City didn’t design the plan or the funding policy, the GA did. The funds are separate legal entities. If they run out of money the Courts would decide who pays and how much, but the funds have the obligation, not the city.
Comment by Name/Nickname/Anon Wednesday, May 13, 15 @ 3:44 pm
===the Courts would decide who pays and how much===
Key phrase.
Comment by Rich Miller Wednesday, May 13, 15 @ 3:45 pm
And it could be years of reduced benefits before the courts sort it out. The reality is the GA needs to change the funding policy, but no one has extra money to pass out.
Comment by Name/Nickname/Anon Wednesday, May 13, 15 @ 3:48 pm
I cannot believe that our host buried the lede on this one: Brendan Reilly and Matt O’Shea want to pay the debt by taxing pot!
Comment by Reality Check Wednesday, May 13, 15 @ 3:49 pm
I like Senator Biss’s approach.
But this appears to target just the City of Chicago, CPS (CBoE), and Cook County, as they were never part of IMRF.
But if that is the case, there’s going to be some unintended/unanticipated consequences, which currently can be seen happening in IMRF jurisdictions.
1) It’s actually going to encourage less full time employment, and much more part time and contract work. Why? Because the trend in IMRF places has been to start to ‘hollow out’ the workforce in many local governments.
You see a lot more interns, and for longer time periods.
2) If programs are optional or compensated, but not mandatory, they are being reduced/cut. Seeing this a lot in Health Departments. If programs don’t pay for themselves (or generate ample cash flow), they are being cut.
3) Expect to see a lot more outsourcing.
4) Expect to see a lot more mid FY ‘emergency’ cuts due to cash flow issues. Budgeting issues are going to become really tense, because everybody who can, tends to levy for Working Cash (Fund 031, IIRC), but it always seems to get cut as part of PTELL (the fiscal admins always seem to move the Fund 031 extension money to other funds if overall limited by PTELL).
May not be able to do that in the future.
5) Don’t know what the fiscal layoff policies are (assume it varies pretty much everywhere), but methinks ‘fiscal emergency’ might qualify.
Might take a while, but going to get to be nasty.
Just a few thoughts…..
Anyway, nice initial step by Senator Biss. Give the guy some real kudos, he’s trying. And it’s a truly ugly mess he’s trying to deal with….
Comment by Judgment Day Wednesday, May 13, 15 @ 3:54 pm
==========Tbe city can’t implement that. The state has to do it first. ===========
So Madigan and Cullerton could use their veto proof majorities to let Chicago move forward on a city income tax?
Comment by Downstate Wednesday, May 13, 15 @ 4:12 pm
Coincidence that Moody s and the court waited until after the election to make their move…
I don’t think so!
Rahm Emanuel for president 2016!
Comment by What is to be done? Wednesday, May 13, 15 @ 4:38 pm
A lot of towns have been making their annually required contributions, but have still seen their unfunded liabilities increase.
Comment by GA Watcher Wednesday, May 13, 15 @ 4:41 pm
For as long as I can remember NYC has had an income tax, FWIW. The bazillionaires keep flocking to it. Chicago could weather the initial blowback. Of course, as a native NY’er I’m obliged to say chicago ain’t NYC. Go Rangers tonight!
Comment by Scholar athlete Wednesday, May 13, 15 @ 4:42 pm
“Just as we must hold our state government accountable for pension contributions, so should we hold Illinois’ local governments accountable,” Sen. Biss said.
Senator- I know you haven’t been in the GA forever, but if you and your fellow legislators had actually “held the state accountable for making pension contributions” in past budgets, we wouldn’t be in the mess we are in now.
Comment by Lester Holt's Mustache Wednesday, May 13, 15 @ 5:09 pm
Daley went for a revenue Hail Mary with the Olympics. He socked away money from the parking meters, Skyway and TIFs to make it happen.
When it didn’t, he blew all the one-time money on his last budget and bailed.
He didn’t want to stick around for the tough, grind-it-out yards.
Comment by Wordslinger Wednesday, May 13, 15 @ 6:08 pm
When a corporation suddenly faces a huge payment it cannot pay- it can threaten bankruptcy to negotiate a resolution or if necessary- file a chapter 11 and attempt a restructuring. It is ridiculous that Chicago is unable to access the bankruptcy courts or at least threaten to do so in order to force the banks to restructure the swaps. If Chicago has to come up with 2.2 billion in order to resolve the consequences of the downgrade- the legislature needs to immediately authorize the City to file a BK
Comment by Sue Wednesday, May 13, 15 @ 6:18 pm
Because I don’t know as much about the Chicago pension mess as I do the State one, I’ve got a serious question.
Didn’t Chicago actually ask to take over the responsibility for the CPS pensions and agree to do so in exchange for the increased school funding formula? Or did the State cram it that change down Chicago’s throat?
If the answer is Chicago asked for it, then I don’t see how Chicago, at least for CPS, will be able to duck responsibility to pay the CPS teachers’ pensions even if the underlying fund were to be deleted due to underfunding.
Comment by RNUG Wednesday, May 13, 15 @ 10:21 pm
We need to stop Rauner and his attacks on the union. He hates the everyday american
Comment by Anon Wednesday, May 13, 15 @ 10:29 pm
myself @ 10:21 pm
“depleted” , not “deleted” …darn auto-correct
Comment by RNUG Wednesday, May 13, 15 @ 10:39 pm
RNUG, as I recall, the city asked for that when they “took over” CPS in the 90’s. Like you, I’m not as well-informed on upstate vs, downstate, but I think that to be the case.
Comment by Arthur Andersen Thursday, May 14, 15 @ 5:24 am
The Chicago pension messes are largely a result of chronic payment shorts by Daley, but Emanuel wears the jacket for the downgrades, too.
He’s known that these big payments to the funds were coming for four years, but chose not to prepare for them. Instead, he chose to play hardball with the unions and pretend dubious unilateral cuts were a “plan.”
Now the Supremes have ended that pipedream, and the resulting downgrade to junk could put the city on the hook for another $2.2 billion.
This mess was foreseeable and avoidable. It is the result of choices by Mayor Gravitas I and Mayor
Gravitas II. Rather than sobriety and responsibility, they chose hubris and recklessness.
Comment by Wordslinger Thursday, May 14, 15 @ 8:03 am