Illinois governor signs bill that increases Chicago's pension liabilities

BY SourceMedia | MUNICIPAL | 04/06/21 12:36 PM EDT By Yvette Shields

Illinois Gov. J.B. Pritzker signed legislation that benefits retired Chicago firefighters, rejecting city warnings adding to its already burdensome pension tab could damage ratings and drive up taxes.

The added cost to bring cost-of-living adjustments for all firefighters in tier one up to a simple 3% annual increase despite their birth date amounts to $18 million to $30 million annually and up to $823 million in full by 2055 when the fund is slated to reach a 90% funded ratio.

Pending legislation to do the same for the police fund carries a steeper price tag of up to $90 million annually and $2.6 billion through 2055.

?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,? Pritzker said Monday after signing the legislation passed during the January lame-duck legislative session and sent to his desk Feb. 4. ?HB 2451 creates a system that gives all firefighters certainty and fair treatment.?

Public policy and business groups had joined Mayor Lori Lightfoot in urging Pritzker to veto the legislation, calling it an unfunded mandate for the city and its taxpayers, who are already strained by growing contributions that consume much of the city?s property tax receipts to service a pension system with $31.8 billion of collective net pension liabilities.

Funded ratios of Chicago's four retirement systems range from 18% to 42%. The firefighters fund is at 18%.

Chief Financial Officer Jennie Huang Bennett told lawmakers during recent testimony on another pension proposal that unfunded mandates imposed by lawmakers could damage the city?s ratings.

The bill?s sponsor and union officials cast the bill as a fix; a matter of fairness, fiscal responsibility, and transparency that codifies existing practice. Lawmakers every few years have moved the birth date requirement to encompass firefighters as they retired so the full cost of the long-observed benefit was not factored into actuarial assessments.

The Pritzker administration laid the groundwork for the signing by noting after passage that the legislation had sufficient votes to survive an override and passed with the majority of Chicago-based legislators on board. Lightfoot countered that it was passed swiftly during a lame-duck session with little review.

?This bill is fiscally irresponsible and validates a Springfield practice of cutting backroom deals without full transparency and debate,? Lightfoot said in a statement after Pritzker signed the legislation. ?As Mayor, I have a responsibility to ensure a stable financial future for our city and this bill substantially undercuts those efforts.?

The two tussled over the subject of funding. ?A key missing element is an accompanying revenue stream from Springfield to pay for this $18-30 million annual new financial obligation,? Lightfoot said.

Pritzker offered up the prospect of new property tax revenue expected from the long-planned sale of the state?s downtown Chicago headquarters known as the James R. Thompson Center.

?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,? Pritzker said.

Plans to sell the building were first announced in 2015; when it actually takes place and for how much money remains uncertain leaving the city to cover the near-term costs on its own. The $1.8 billion in direct aid Chicago expects to receive from the American Rescue Plan signed by President Biden last month can?t go directly to cover pension costs under the package?s terms but it will ease strains in other areas.

The federal relief funding will come in two tranches over the next year. The city must tread cautiously in its use to avoid adding to its structural budgetary woes, and the pension legislation imposes another long-term, recurring cost. The city must structurally balance its budget while also covering the schedule of rising pension contributions to avoid credit deterioration, rating agencies have warned.

The costs imposed by the new bill will likely be borne by the property tax, which Chicago raised by $94 million late last year to help wipe out a $1.2 billion budget gap, half of which was due to COVID-19 pandemic wounds and half to structural expenses.

The measure extends a simple, 3% COLA to all Chicago firefighters who participate in the Firemen?s Annuity and Benefit Fund of Chicago hired by the deadline that establishes a tier one group. A group of firefighters that miss a birth date cutoff of 1966 currently receive a 1.5% COLA.

The city and firefighters fund agreed in previous years to extend the benefit by moving the cutoff date on a piecemeal basis.

?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,? state Sen. Robert Martwick, D-Chicago, said in the Pritzker statement.

Martwick, who heads the Senate pension committee, sponsored the original legislation in the House while he was a member there and pursued its passage after he joined the Senate. HB 2451 becomes effective immediately as Public Act 101-0673. ?Is COVID a good time to do this? No, but it?s never going to be a good time to rip off the Band-Aid,? Martwick said in a recent interview.

Biggest challenge
Unfunded pension obligations are arguably Chicago's biggest fiscal challenge and cited by rating agencies a primary obstacle to upgrades.

All four Chicago pension funds operate under state laws that mandate increased city contributions until they reach actuarial funding levels. The city hit the actuarial mark for police and fire pensions last year and will hit it for the municipal and laborers? funds in 2023.

The funding ramps were designed to raise funding levels to an actuarial level at a pace that didn?t crush taxpayers. Property taxes, a 9-1-1 surcharge, and water surcharge were raised to cover the higher contributions.

The new funding track removed the near-term risk of insolvency for the municipal and laborers funds while pushing off a state-imposed funding hike for police and fire.

Market participants praised the city for taking action amid legal rulings that the Illinois constitution bars any benefit cuts or higher employee contributions but also see the funding schedules as flawed because it will take years before funded ratios improve.

The city, which operates on a $4 billion corporate fund and $12.8 billion total budget, owes $1.8 billion in pension contributions this year. That?s up from $1.68 billion last year and in 2023 the total contribution rises to about $2.2 billion.

Chicago Civic Federation President Laurence Msall earlier this year warned the imposition of a new benefit on a local tax base by the state government is the most alarming part of the bill. The federation joined with the Chicagoland Chamber of Commerce, the Civic Committee of the Commercial Club of Chicago, and the Illinois Municipal League in a letter urging Pritzker?s veto.

?This change will significantly increase the fund?s unfunded liability and decrease its funded ratio, which it can ill afford,? the group wrote, also noting the actual rate of inflation has averaged 1.7% annually over the past decade, underscoring the heavy cost of providing a 3 % COLA.

Lightfoot and Pritzker have previously clashed over pensions. Lightfoot pitched the idea of the state taking over the city?s funds but Pritzker immediately shot the idea down, warning of the impact on the state?s ratings, which sit one notch above junk.

Lightfoot's predecessor as mayor, Rahm Emanuel, pitched a $10 billion pension obligation bond borrowing. Lightfoot rejected that plan but the city?s chief financial officer says pension borrowing is on the table if it?s accompanied by funding and policy reforms.

The city is also battling other legislative efforts to raise contributions beyond scheduled hikes. Municipal Employees? Annuity and Benefit Fund-backed legislation would raise the level of required contributions above the schedule in the existing ramp up to an actuarially based contribution scheduled for 2023.

The current state-mandated schedule sets the contributions at a dollar amount. The legislation would instead require a payment equal to 80% of an actuarial level in 2021 and 90% in 2022, adding $800 million to current contributions. No action has been taken on that bill.

?These unfunded mandates jeopardize our bond ratings and the recent conversations we?ve had with the rating agencies affirm this,? Bennett told lawmakers during recent committee hearings.? The city lost $886 million of tax revenue in 2020 due to the pandemic and $783 million in 2021.

Chicago carries ratings of BBB-minus from Fitch Ratings, A from Kroll Bond Rating Agency, a BBB-plus from S&P Global Ratings, and a junk rating of Ba1 from Moody?s Investors Service. All assign a negative outlook.

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Lower-quality debt securities generally offer higher yields, but also involve greater risk of default or price changes due to potential changes in the credit quality of the issuer. Any fixed income security sold or redeemed prior to maturity may be subject to loss.

Before investing, consider the funds' investment objectives, risks, charges, and expenses. Contact Fidelity for a prospectus or, if available, a summary prospectus containing this information. Read it carefully.

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