Lightfoot tries to solve pension problem for Chicago

For Chicago’s new mayor, the residual bruises from the recent strike by the Chicago Teachers' Union, and the heat over the amount of money for so-called “wrap around services” such as school counselors, nurses and social workers, not to mention staff support salaries, seemed like a Herculean effort that required tact, patience, and not nearly enough money to make it all work, but it did.

That is not the only challenge that Mayor Lori Lightfoot faces, in her efforts to provide Chicago with a balanced budget; at the head of her list is help for the city’s pensions for those public servants and first responders, to fill a hole of what has grown, from being $23 billion short, under the Rahm Emanuel administration, to now $30 billion, and sent her to Springfield this Tuesday, to speak with another newly inaugurated lawmaker, Governor, J.B. Pritzker.

In a recent examination by The Chicago Tribune, in October, they said, “There are three main reasons the gap widened by nearly $7 billion. By far the biggest is that the people who run the four retirement funds changed their economic assumptions. They reduced the amount they expect to earn by investing the money already on hand, and they increased how long they expect retirees will live and collect benefits.”

For those who long for the old regime, a second look is deemed, for in their study, it was noted, “. . . Emanuel’s plan put off the largest increases in pension contributions to get the system back on track until after he left office.”

“That meant even though the city was collecting as much as $822 million a year in new taxes for pensions as employees were kicking in more, it still wasn’t enough to cover the cost of retirement benefits going out. Emanuel said raising taxes any higher at that time could have hurt the city’s economy.”

“(Chicago’s) pensions are the most poorly funded of the largest U.S. cities,” the Standard & Poor’s bond rating agency stated in a Sept. 23 report on pension funds across the nation. The annual contributions to pay off pension debt in cities like Chicago make it tougher to spend money on “priority services and infrastructure investment,” they concluded.”

Now comes the clinker, and the reason for the road trip: “She’ll have to come up with an additional $989 million a year for pensions by 2023, according to her administration’s projections. If there’s a downturn in the economy that affects pension investments, that figure could go even higher.”

In June, longtime political observer, Greg Hinz, in Crain’s Chicago Business reported that, “According to knowledgeable sources in Chicago and Springfield, after weeks of preliminary maneuvering the mayor is pitching nothing less than a state takeover of the city's cash-short pension funds, which under current law will require upward of $1 billion in new city tax hikes over the next three years to reach a path to full actuarial funding. Her proposal would consolidate city pension money with smaller downstate and suburban pension funds in a new statewide system. In some cases, those non-Chicago funds are even worse off than the city's.”

Past blame can be laid squarely on the shoulders of her predecessors, as previously noted in this column, but also by the Tribune in its own analysis, “For decades, then-Mayor Richard M. Daley and his predecessors did not contribute enough money to prevent city worker pension funds from losing ground. That allowed them to maintain city services without pushing politically unpopular tax increases — even as they further sweetened pension benefits for employees.”

Summing it up, many economists, actuaries and city hall observers note that Emanuel kicked the can down the road to his successor, who now comes begging, hat in hand, before the governor to help make her budget proposal a reality.

We noted back in 2018, again citing the Tribune, “In addition, Chicago “could find itself facing higher costs that were not included in the projected budget forecast. Those potentially include tens of millions of dollars for raises and back pay for police, firefighters and some other city workers whose unions are negotiating new contracts — as well as any costs added to the expense of running the Police Department as a result of a proposed federal consent decree aimed at restoring community trust in the long-troubled department.”

This past July, Elizabeth Bauer in Forbes quoting from the Tribune, supported Pritzker by saying that, “Illinois cannot assume the unfunded pension liabilities of Chicago and other municipalities across the state because its credit rating would be reduced to junk status if it did.”

Pritzker categorically added, “To be clear, the state is at just above junk status in its credit rating, so there are not liabilities that can be adopted by the state that would not drive us into junk status . .  “So that is not something that we can do.”

Gov. Pritzker

The Illinois State Constitution also forbids any reductions and while the Illinois Retirement Fund seems like a logical vehicle for her aims, Lightfoot is not suggesting that, but in some conservative circles there is this: “although municipal employees participate in this consolidated fund, police and firefighters do not necessarily participate in the IMRF, but have rinky-dink pension funds managed individually by their individual police or fire department, with a total of 356 police and 297 firefighter funds (as of 2016)”.

“As an indicator of how foolish this is, 43% of all public pension plans in the United States are Illinois plans.  Many of these are just as poorly funded as Chicago's funds, and the average funding level (again as of 2016) was 57.6%.  And among Pritzker's proposals is a task force to evaluate a consolidation of these pension funds, in order to provide the same efficiency of administration as the IMRF,” Bauer added.

The latest news is that a gubernatorial task force has recommended an amended version of consolidation of over 640 local police and fire pension funds, and as Hinz now reports, “partially consolidating hundreds of police and fire pension funds in suburban and downstate communities to cut costs for taxpayers, and the panel left the door open to potentially including Chicago in the same deal.”

For Lightfoot, struggling to bring city pension deficits in line, there was this disappointment:

 “Also as expected, the panel opted to exclude Chicago’s police and fire retirement system from the consolidation proposal. But it also said that though those systems get better returns than the smaller funds, the state should “continue to review the potential advantages of consolidation of these larger systems and to make recommendations to the governor on this issue.”

The timing could not be less fortuitous as Hinz noted: “That's about all that Mayor Lori Lightfoot gets out of the report, which comes less than two weeks before she's scheduled to unveil a 2020 city budget, and cover a $838 million spending gap,” making for some scrambling in City Hall.

It’s easy enough to see that, as we have noted, on more than one occasion, covering the mayor’s financial challenges, but when we take a longer look at state finances and how, in a much wider context, Chicago’s financial problems are intertwined with those of Illinois, it makes the Land of Lincoln, the land of woebegone.