STUMP » Articles » A Deal, But No Grand Bargain, in Chicago » 24 May 2016, 05:03

Where Stu & MP spout off about everything.

A Deal, But No Grand Bargain, in Chicago  

by

24 May 2016, 05:03

As recently noted, Chicago pension financial reports have been coming out, and it’s ugly. A relatively small reform was struck down, and new accounting standards also boosted the numbers.

Well, looks like some players have decided to make a deal:

Emanuel cuts new deal to save Laborers Pension Fund

Two months after the Illinois Supreme Court struck down his plan to save two of four city employee pension funds, Mayor Rahm Emanuel agreed Monday to save the smaller of the two funds with a mix of union concessions and revenue generated by a telephone tax increase once earmarked for both funds.

To squeeze through a legal window the Supreme Court cracked open, the agreement with Laborers Locals 1001 and 1092 calls for employees hired on or after Jan. 1, 2017, to become eligible for retirement at 65 in exchange for an 11.5 percent pension contribution.

“They haven’t earned any benefit, so we can change their benefits going forward,” Budget Director Alex Holt said.

Veteran employees hired after Jan. 1, 2011, will have a choice. They can retire at 65 with an 11.5 percent pension contribution or wait until 67 with an 8.5 percent contribution, a 35 percent increase. Emanuel’s now-overturned plan called for a 29 percent increase in employee contributions. The city is still working on a trade-off for employees hired before Jan. 1, 2011.

In exchange for those cost-saving concessions, Emanuel has agreed to earmark all of the revenue from a 56 percent increase in Chicago’s telephone tax approved by the City Council in 2014 to shore up a Laborers Pension Fund with $1.3 billion in unfunded liabilities due to run out of money in 12 years.

The city’s payments to the fund will increase by “no less than 30 percent a year for the next five years,” under the agreement.

…..
“This plan would have the city going on a 40-year plan to get to 90 percent with a five-year ramp or phase-in,” he said. “That’s an improvement over the current structure, but not what actuaries recommend for solving a pension crisis. They recommend 100 percent funding within 30 years or less.”

Here’s a prediction: you’re not even going to get to 90% in 40 years. Because Chicago will have gone bankrupt in the interim.

But don’t mind me. Good on ya for grabbing the phone tax… til all the landline phones go away. I wonder how many years that will last.

I wouldn’t be surprised if there had been a telegraph tax back in the day. How long did that throw off revenue?

Another story on the deal:

City reaches new pension deal with laborers

The Emanuel administration has reached a new deal to refinance one of the city’s cash-short pension funds, this one covering more than 5,000 current and retired laborers.

The good news is that the agreement being released today should pass legal muster with the Illinois Supreme Court, which rejected a prior pact on constitutional grounds. The pact is designed to ensure that the fund has 90 percent of the money on hand needed to pay benefits by 2057.

The bad news is that city taxpayers will have to chip in an additional $70 million or so to start, and some of that money will be diverted from a different pension fund covering other employees. Potentially worse, the deal will have to be approved by the legislature and signed into law by Gov. Bruce Rauner, who has balked at signing other pro-Chicago legislation until Mayor Rahm Emanuel convinces other Democrats to back the pro-business, union-weakening structural changes the governor wants.
…..
At the moment, after the earlier state Supreme Court action, the Laborers’ Retirement & Retirement Board Employees Annuity & Benefit Fund has only about half the assets needed to pay promised benefits and faces insolvency “by 2029.”

…..
To get that money, the city agreed to turn over to the laborers’ pension the roughly $40 million a year it got in a 2014 hike in the city’s 911 telephone tax from $2.50 a line to $3.90. Some of that money was supposed to go to the larger municipal pension fund which covers white-collar workers, but was freed up under the recent Supreme Court decision.

In addition to that $40 million, the city will contribute an extra $30 million a year drawn from city enterprise funds, covering things such as operation of O’Hare and Midway airports as well as water and sewer construction. Those shifts, raising the city’s total contributions by more than 30 percent, will be phased in over five years starting in 2018. Taxpayer costs thereafter are expected to rise $3 million to $5 million a year.
Holt denied the city is “robbing Peter to pay Paul” by shifting phone-tax money that, in part, would have gone to the municipal fund.
…..
Update, 4:40 p.m.—AFSCME, which represents many of the workers in the municipal fund, is taking a pass on whacking the deal. In fact, spokesman Anders Lindall is almost warm about it.

“While we have not met with the city to discuss the pension funding problem, we have always indicated that we want to work with anyone of good faith to address it in a way that’s fair, constitutional and fiscally sound,” he said in a statement. “Of course, every pension fund and every union is different, so we don’t know whether an agreement like this one will be right for the municipal fund and our members who participate in it.”

Thing is, Rahm can’t promise that phone tax phantom revenue to other funds. I guess that is the gift to the Laborers fund for coming to a deal before all the other groups.

I’m not seeing all that much in this deal other than as a point to say “Look! A deal can be made!” … because reducing pension costs for new employees is just working on the margins. The big problem is mainly the pensions already accrued, so while reducing costs going forward helps, it helps very little.

NO GRAND BARGAIN FOR CHICAGO

The items below are a little older, and somewhat in response to Nathan Bomey’s best-selling book on the Detroit bankruptcy.

One central element to the story is the “Grand Bargain” where a variety of players were asked to throw in money (lots of money: about $800 million), that helped provide funds to reduce proposed pension cuts in Detroit. Non-profit foundations like the Ford Foundation provided a large amount of these funds. (Yes, I’m eliding a big part of this bargain….wait for it.)

So, of course, a few Chicago “thinkers” thought: hey, just the thing to fix Chicago’s issues!

First, Greg Hinz asks Should big foundations fill Chicago’s pension hole?

If taxing the rich won’t cure Chicago’s pension woes, how about something that arguably would be just as satisfying to the 99 percent: Getting the city’s huge foundations to come to the rescue?

That’s the idea being pitched by Howard Husock, a vice president and head of the social entrepreneurship initiative at the Manhattan Institute, a libertarian New York think tank.

In a new paper today, Husock writes about the “grand bargain” that pulled Detroit out of bankruptcy and suggests it be applied to other Rust Belt towns, most notably Chicago, whose nearly $20 billion in unfunded pension liability has already forced one round of painful property tax hikes.

Husock notes that a logjam in which workers and retirees refused to give up benefits and Detroit officials refused to put more money on the table—sound familiar?—was broken when a group of philanthropies agreed to put up $366 million to lever a solution.

The money—together with a cash infusion from the state of Michigan and a workers agreement to cut pensions 4.5 percent and forgo most future cost-of-living hikes—was enough to slash Detroit’s annual pension contribution by four-fifths, removing the need for big property tax hikes, Husock writes.

Chicago has no huge Ford Foundation, which put up $125 million itself. But it does have any number of big charity institutions, including the Joyce and MacArthur foundations with total assets of $13.5 billion, Husock says. If they spent just 1.5 percent of their assets on such an effort, the pension hole would be cut by $1.8 billion.

Of course, labor would have to take $8.8 billion in cuts to replicate the Detroit model. And the foundations would have to go along.

But, hey, it’s a thought.

Andy Dillon also jumps on the grand bargain train:

Chicago is facing serious financial challenges. The city should take a pointer from Detroit. While Chicago is by no means Detroit, there is a corollary for Chicago in the role that leaders of business and nonprofits played in Michigan to address Detroit’s complex challenges. Most significant, these organizations contributed to the “Grand Bargain,” which was the final piece of the puzzle leading to the historic settlement between Detroit and its creditors. As a politician and state official during this period, I can say Michigan’s private sector leaders made a big difference.

Chicago’s businesses and nonprofits have a vested interest in a functioning city and state government. That includes reliance on services, infrastructure, a talented workforce and a quality of life needed to attract and retain residents. Accordingly, these organizations should be a catalyst for change. They have the credibility, financial means and skills to help forge Chicago’s version of the Grand Bargain.

Prior to filing bankruptcy in mid-2013, Detroit had accrued obligations of $18 billion, or roughly $26,000 per resident. By comparison, Chicago’s long-term debt, unfunded pension and other post-employment benefits liabilities exceed $60 billion. Because of Chicago’s much bigger population, that works out to $23,000 per resident. On the plus side, Chicago is a vibrant, well-run city with smart and capable political leaders. Mayor Rahm Emanuel and Chicago public unions recently made a noble effort to address a portion of their liabilities, but the Illinois Supreme Court found constitutional flaws in their approach. Despite this setback, the mere fact that they were able to forge the reform measure offers hope. Unfortunately, time is not on Chicago’s side.

In Michigan, while we were suffering from the meltdown in manufacturing and the financial collapse of Detroit, Michigan’s political leaders had reliable partners offering help: Michigan’s CEOs. In addition to having a stake in the community (like CEOs in Chicago do), these individuals had resources, relevant expertise and, as a result, access to the media. They offered help in a variety of ways, some via public pressure complaining about political gridlock (we didn’t always appreciate that), funding studies, providing in-kind services and even supporting capital investments. They had a stake in the outcome; they expected results and stepped up to help.

Hold your horses, guys. Both of you are eliding over the centerpiece of the Grand Bargain: it wasn’t the pensions.

It was the Detroit Institute of Arts:

‘Grand Bargain’ Saves the Detroit Institute of Arts

DETROIT — With his decision on Friday approving this city’s federal bankruptcy plan, Judge Steven W. Rhodes — aided by nearly a billion dollars in private and state rescue money — ended an unprecedented threat to the Detroit Institute of Arts, whose world-class paintings and sculpture could have been parceled off at auction to help pay city debt.

Yet, in a very real sense, the ruling ends a threat to the museum’s existence that stretches back not just two years, when the city began to tumble toward insolvency, but almost a century, to 1919. That was the year the donation-starved institute became a municipal department, linking its fortunes to those of a city whose finances would be highly unstable.

That’s why all those players threw in. Indeed, if you read Bomey’s book, you’ll see that the foundations weren’t all that stoked about being explicitly told that the money they were giving to essentially buy out Detroit’s stake in art at the DIA would be used for pensions. These foundations were about doing new things, not paying off old debts.

But they were eventually convinced, because of the central fact: if they didn’t throw in money, Detroit would likely have to find buyers for the art anyway. And it doesn’t really matter what Detroit did with the money once the foundations (and some other players) paid for the art. It’s like people giving me money, afraid of feeding my opera habit. Well, it’s not your business what I use the money for.

Anyway, what does Chicago have to bargain with? Are there some assets that the Daleys didn’t already flog off?

You do know about the parking meter ‘deal’, right?

So no. There will be no grand bargain for Chicago. The Laborers Fund did well to get in front of other players, but somehow I doubt players like the Chicago Teachers Union are terribly willing to play ball.

And they’re the biggest pension liability of all.

Compilation of Chicago posts.


Related Posts
Testing to Death: Which Public Pensions are Cash Flow Vulnerable?
Kentucky Pension Blues: Let's Get This Fire Started
Wisconsin Wednesday: Is Contribution Growth Moderate?