STUMP » Articles » Public Pensions Watch: Don't Get Your Hopes Up, Chicago » 4 October 2014, 07:03

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Public Pensions Watch: Don't Get Your Hopes Up, Chicago  


4 October 2014, 07:03

I have been collecting reactions to the Stockton bankruptcy ruling, but that’s not the only pension-related court rulings recently.

Recently, Mayor Rahm decided to cut the retiree liability by cutting the health benefits. If you might remember, the Illinois Supreme Court ruled that retiree benefits for those in a state pension plan couldn’t be cut, so Chicago retirees thought they had a slam dunk case.

Not so fast:

The city of Chicago has won a federal appeals court decision allowing it to proceed for now with plans to reduce subsidies for retiree health care premiums, a ruling that affects about 28,000 former city workers.

The Emanuel administration’s victory comes despite an Illinois Supreme Court ruling in July in a separate case that state retiree health care benefits are protected by the Illinois Constitution.

In December, U.S. District Court Judge James Holderman dismissed a federal case brought by city retirees who challenged Mayor Rahm Emanuel’s planned phase-out of health care subsidies over three years, largely based on Mr. Holderman’s prediction that the Illinois high court would not extend constitutional protection to retiree health benefits.

However, the state Supreme Court ruled the opposite way. Retirees already had appealed Mr. Holderman’s decision, but other legal arguments raised by the city have kept the case alive despite the state Supreme Court ruling.

While their appeal is pending, the city retirees sought to block any changes to their health care subsidies, but their request for a preliminary injunction was denied without explanation by the U.S. Court of Appeals in Chicago earlier this week. The city expects to save $27 million next year from reduced health care subsidies.

The argument has been that the Chicago employees and retirees are not under the state plan, and thus the guarantees in the state constitution don’t hold.

What was the benefit cut, by the way?

The court’s denial Tuesday means some retired city workers will see their insurance premiums climb significantly when rate increases take effect Jan. 1.

Chicago is phasing out the city’s 55 percent subsidy for retiree health insurance by 2017. * Retirees have sued to preserve the city’s contribution. Former workers who *retired before Aug. 23, 1989, aren’t affected by the phase-out and are continuing to get subsidies of up to 55 percent.

Two items: they’re getting rid of the city subsidy for retiree health insurance, meaning the retirees have to go on Obamacare (if under 65) or Medicare (if over), I suppose. If Chicago is successful in pushing its retirees… and then employees… on federal healthcare subsidies, it does fix the acuteness of Chicago’s problem.

Second item: people who retired before August 1989 retired over 25 years ago. Shouldn’t most of them be on Medicare already, even if they retired at an insanely early age? Kind of curious what kind of coverage is being subsidized for those over 65. I’ll have to find out later.

But back to the supposed respite for Chicago.

Even if this cut sticks, other issues are afoot.

This happened on Friday:

Retroactive paychecks with a $45 million pricetag for Chicago taxpayers were mailed Friday to 4,645 firefighters and paramedics—12 days earlier than required under their newly-ratified contract.
The retroactive payment totals “between $40 million and $45 million” and includes “salary, overtime pay, special pay and pension payments” since June 30, 2012, when the old contract expired.
Earlier this year, Emanuel convinced the City Council to double — to $1 billion — a “commercial paper” program used to tide the city over between bond issues.

“It’ll be some mix of current cash and, if there is any borrowing, it will be short-term borrowing only paid for over the life of the contract, which expires in 2017,” Holt said last month.
The pre-Medicare fee for retiree health care was one of the only givebacks Emanuel was able to wring out of Local 2.

The mayor came up empty on his laundry list that took aim at treasured union perks such as holiday and duty-availability pay; clothing allowance; pay grades; premium pay; non-duty lay-up coverage; the physical fitness incentive; and the 7-percent premium paid to cross-trained firefighter-paramedics. Nor did the union agree to Emanuel’s plan to have “double houses” — stations with both engines and trucks — to be staffed by nine firefighters instead of 10.

Instead, Emanuel settled for what City Hall sources have called a “vanilla” agreement in hopes of creating a “collaborative atmosphere” that will set the stage to solve the city’s pension crisis.

In 2016, Chicago is required by state law to make a $550 million contribution to stabilize police and fire pension funds that now have assets to cover just 30 percent and 24 percent of their respective liabilities.

Good for them for using current cash (even if it’s short-term borrowing) for current expenses.

But check out that bolded item. Chicago can’t swing that payment at all.

Here’s one bad sign: more retirees than active employees

Among the many reasons Chicago’s police and fire pensions are grossly underfunded are inadequate long-term planning, legislated benefit increases, pension holidays and overall kicking-the-can-down-the-road. Another factor working against Chicago is the imbalance between active and retired public safety officers. The New York City police pension received some unwelcomed attention recently because the number of retirees it supports exceeds the number of active police on the streets.

Little known fact: Chicago has the same upside-down relationship between its active and retired public safety departments.

Policemen’s Annuity and Benefit Fund reports for 2013 show participants in the pension plan include 12,161 active police versus 13,159 police retirees/survivors. In addition, a large portion of the active force is nearing or eligible for retirement, with 34% aged 45-54 and 25% having 20 or more years of service. Total retiree count increased by 1.8% in 2013, while total expenditures for retiree benefits increased by 4.56%.

In 2013, the number of active and retired/survivor firefighters was almost identical, 4,685 versus 4,642, according to Firemen’s Annuity and Benefit Fund reports. Expenditures for retiree benefits rose a full 8% during 2013, while the number receiving benefits rose only .6%.

The upside-down relationship between active participants and retirees/beneficiaries did not cause the pension underfunding problem and upside-down plans can be properly funded, but as retirement costs escalate, it will make fixing those pensions more expensive.

As the last paragraph notes, having this demographic issue is not necessarily a problem, if the pension plans were fully-funded. The issue is that the pension contributions are often calculated as a percentage of payroll, and as the retiree obligations grow while the active payroll doesn’t grow as quickly…. that percentage climbs dramatically, and it looks really bad.

Well, how funded are the Chicago pensions, anyway?

Glad you asked:

The aggregate actuarial funding ratio of 10 Chicago-area pension plans was 45.5% at the end of fiscal year 2012, down from 74.5% in 2003, said a recent report from the Civic Federation, an independent government research organization in Chicago.

The $1.9 billion Chicago Transit Authority Employees Retirement Plan reported the highest actuarial funding ratio at 59.4%, while the $1 billion Chicago Firemen’s Annuity & Benefit Fund reported the lowest at 24.4%.

Laurence Msall, president of the Civic Federation, attributed the funding drop to insufficient employer contributions. The “statutorily required contributions (were) far below what the actuaries recommended for stabilizing those funds,” Mr. Msall said in a telephone interview.

In order to meet the pension funds’ annual required employer contribution in fiscal year 2012, employers should have contributed a total of about $2.8 billion to the pension plans, the report found. Instead, they contributed $872.5 million.

Mr. Msall added that the plans’ unfunded liabilities “continue to rise” against a “backdrop of relatively good returns.”

That’s not a good thing.

And while various actors think the ruling in Stockton and Detroit pension cuts may presage success in cutting retiree obligations overall in Chicago, you need to know this: unlike California municipalities, which can independently decide whether to file bankruptcy, Chicago cannot file for federal bankruptcy without getting state permission.

Think about the situation above — Mayor Rahm couldn’t wring out anything but the most minor of concessions in the recent contract negotiations (that were backdated two years, as well). Do you think any of the Democrats in Illinois want to allow Chicago to declare bankruptcy?

If you thought Detroit’s political theater was bad, wait until it’s Chicago.

So here is my prediction: the “required” contribution for Chicago pensions in 2016 will be kicked down the road by the Illinois legislature, and because of can’t fail thinking the plan will step that much closer to de facto failure. Tax rate changes one way or another won’t change anything. The asset death spiral should start within the next decade (when they have to liquidate the portfolio to cover payments to retirees, and as the pension obligation still grows, the asset pot shrinks and shrinks, even if returns are high.)

So firefighters et. al., my advice is to take those “windfall” checks and salt them away. You may find that you’re going to have to buy your own annuities in the future.

Compilation of Chicago posts.

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