STUMP » Articles » Public Pensions Watch: Chicago Deal - the Basics » 3 April 2014, 06:12

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Public Pensions Watch: Chicago Deal - the Basics  


3 April 2014, 06:12

So yesterday I laid out the general problem Chicago has: underfunded pensions and a requirement to step up contributions in a huge way in a year or two.

Also, accounting changes coming up that will make the situation look even worse than current financials show (and many of us think that approach isn’t showing how bad it really is).

As a result, recently the mayor of Chicago (Rahm Emanuel) has put forth a proposal to deal with pensions. I will just cover the specifics of the proposed deal — reactions to come later.

The broad outline of the deal

Mayor Rahm Emanuel is proposing to raise property taxes and cut retirement benefits for some city workers to start digging out of a massive pension debt he inherited.

The mayor’s proposal involves both taxpayers and city workers paying more. Under the proposal, the owner of a $250,000 home would pay $50 more a year starting in 2016. After five years, the homeowner would be paying an extra $250 a year.

That tax hike is on top of the property tax increases the mayor has enacted at Chicago Public Schools. The new money also would not solve the police and fire pension problem, which could require its own tax increase if Emanuel does not get an extension or other relief from lawmakers this year.

City workers also would pay 2.5 percent more toward their retirement, increasing their contributions by 0.5 percent a year for five years. Employees now pay 8.5 percent of their salary each year for pensions and would ultimately pay 11 percent. The increase would amount to about $1,500 more a year by 2019 for a city worker making about $60,000.

In addition, City Hall would change how it awards cost-of-living increases to city workers. Instead of 3 percent yearly bumps that are compounded, the city would provide increases at the lower of 3 percent or at half the level of inflation, not compounded. In addition, annual pension bumps would not be given in 2017, 2019 and 2025, and there would be a two-year delay in starting the hikes upon retirement.

The city would pay billions of dollars more into the pension system over four decades, with about half of that coming from property taxes. The rest would come from airport and water and sewer fees, savings from cuts to retiree health care and other unspecified budget cuts.

The idea is to eliminate about half of the $19.5 billion City Hall pension debt over 40 years. The city’s pension funds don’t have enough money to stay solvent in the coming decades in large part because the state formula governing city contributions did not require the city to pay in enough money to keep the promises made to employees.

Let us break out the elements.

1. Increase property taxes. Looks like scaling up to 10 basis points extra, on top of recent property tax increases.

2. Require more employee contributions – increase of 2.5 percentage points. In relative terms, though, it’s a 29% increase in employee contributions.

3. Cut in COLAs. I’m not sure what they mean compounded v. not compounded (how does one do uncompounded COLAs?) I will look more into the COLA issue later. It looks like it’s a relatively minor cut, though.

4. Increased contributions to pension from city (which were going to be required anyway) – with revenue from those extra taxes, a couple specified revenue sources, and then unidentified cuts/tax increases.

Step 4 is the obvious bullshit. When you’ve got a hole for contributions and you say “Well, it will come from somewhere”, that means that’s the bit that will never go fulfilled. It’s amazing how often governments manage to get out of paying “required” contributions to pensions.

It’s one of the main reasons public pensions are underfunded. Because there’s nothing “required” about it in many cases. The people who control the money also control the “requirement” laws, and keep giving themselves outs.

Anyway, a taste of things to come:

The Emanuel proposal is similar to the state pension law approved in December in that it would scale back the size of and even skip some annual cost-of-living increases. There are differences, however: While Emanuel would require city workers to pay more toward their retirements, the state law slightly reduces the amount workers have to pay. And where the state law generally raises retirement ages, Emanuel’s proposal would keep it the same or lower it.

The changes would have to be approved by state lawmakers and the governor. A bill that could carry Emanuel’s proposal took a procedural step forward Monday, putting it into position for potentially quick action.

There are questions surrounding the Illinois pensions as well, but I will get back to that later.

Tomorrow, I shall start covering some of the reaction to Rahm’s proposal.

My own take: underwhelmed.

Compilation of Chicago posts.

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