Chicago Seeks Tax Hike to Avert Insolvency for Pension Fund

  • Emanuel plans to raise utility levy for municipal pension fund
  • Without fix, municipal fund will run out of money in 2025

Chicago Mayor Rahm Emanuel is seeking higher utility taxes to keep the city’s largest pension fund from running out of money and set all four retirement plans on a path to solvency.

The city wants to raise the levies on water and sewer bills to shore up the Municipal Employees’ Annuity and Benefit Fund of Chicago, the most underfunded of the four pensions, Emanuel said Wednesday at an investor conference in Chicago. Without changes, the pension that serves more than 70,000 workers and retirees is on track to run out of money within a decade.

The plan would boost Chicago’s payments to the fund by no less than 30 percent over five years starting with the 2017 contribution. New employees will have to pay 3 percent more to their pensions, and employees hired after Jan. 1, 2011, have the option to retire earlier, but will have to contribute more to their retirement fund. The proposal projects that the pension will be 90 percent funded in 2057. Emanuel said he’s met with several unions who are very supportive.

“Every one of the pensions that put the city in a pension penalty are now addressed in a serious way that makes sure businesses can look at the city of Chicago,” Emanuel said at the conference. “And no longer point to the fiscal well-being or the pensions as a dark cloud over the city’s future.”

Investors applauded the move.

“Any time you have moves where the city’s acknowledging and recognizing the pension issue and dedicating receipts and revenues toward it,” that “is going to be accepted positively in the market,” said Gabe Diederich, a portfolio manager in Menomonee Falls, Wisconsin, at Wells Fargo Asset Management, which holds about $40 billion of state and local debt, including Chicago.

For years, Chicago failed to put aside enough taxpayer money to cover the rising cost of pensions. Its four retirement funds are short by $34 billion, and the strain is pressuring the budget as officials are forced to catch up. The stress spurred Moody’s Investors Service to slash Chicago’s rating to junk in May 2015, making it the lowest-ranked major U.S. city except once-bankrupt Detroit. On average, all four of the city’s pensions are only 23 percent funded, according to an annual financial analysis.

Property Taxes

Emanuel’s administration has taken steps to reverse the liabilities it inherited. In October, he pushed through a record property tax hike to shore up police and fire pensions. In May, he reached an agreement with unions to save the laborers’ fund from insolvency. That accord still needs state approval. Even with these steps that inflict pain on taxpayers, it will take decades to bring pension assets in line with promised benefits.

While these are positive steps, the unfunded liabilities aren’t going away. They’re just getting worse at a slower pace, Moody’s said in a July report. Chicago would have to raise nearly $1 billion a year to see a drop in pension liabilities. And that’s in addition to the $543 million property tax jump already approved for the public-safety funds.

The city council is expected to vote in September to raise the water and sewer tax by about 7 percent a year. The tax rate in 2017 will be about 59 cents per 1,000 gallons, and by 2020 and 2021, it will be $2.51. The levy is expected to generate $56 million next year and about $239 million in both 2020 and 2021.

Chicago plans to seek state authorization to increase its pensions payments and alter the employee contributions.

The American Federation of State County and Municipal Employees Council 31, whose members are part of the municipal retirement fund, is reviewing the city’s proposed plan, said Anders Lindall, a union spokesman.

“It’s a good short-term plan with a long-term goal of pension security for city workers,” said Jeff Johnson, a trustee of the pension fund.

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