Analysis: Pension reforms to cost workers $55 million by 2025

Written By Fran Spielman Posted: 04/17/2014, 04:27pm

Mayor Rahm Emanuel’s plan to raise employee contributions by 29 percent to save two city employee pension funds will cost workers $55 million by 2025 and reduce their benefits by 14 percent, an independent analysis has concluded.

The Anderson Economic Group, based in Michigan with a Chicago office, conducted the study at its own expense to determine the true cost to taxpayers and retirees with no vested interest or pro-union bias.

For a 67-year-old retiree with $36,000 in annual benefits from the Municipal Employees pension fund, the cost of the mayor’s cuts was pegged at $9,000 in 2024. That’s because a pension check that would increase by 34 percent without the reforms would rise by only 9 percent with the changes. Employees who are yet to retire would see an increase of 11 percent with the changes.

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The benefit growth disparity widens over time. By the 15th year, it’s 17 percent growth with the changes vs. 56 percent without the reforms, the study shows.

For an employee who retires with a  “starting annuity” of $60,000, the reduction was pegged at $14,160 in the 10th year of retirement and $23,405 by the 15th year.

The Anderson Economic Group also calculated the cost to Chicago taxpayers that Emanuel hopes to offset with a $250 million property tax increase if Gov. Pat Quinn agrees to sign the pension reform bill.

The city will be required to contribute $530 million by 2025. That’s 9 percent of overall city revenues and $450 million more than the city would otherwise be required to contribute without pension reform.

But the cost of waiting even five more years to confront the city’s pension crisis was even worse. It was pegged at $310 million because of lost investment returns.

The mayor’s plan calls for city employees who are part of the Municipal Employees and Laborers pension funds to see their annual pension contributions rise by one-half of 1 percent over the five-year period beginning in 2015.

Those employees currently contribute 8.5 percent of their annual paychecks to their pensions and are not eligible for Social Security. By 2019, they would contribute 11 percent.

That’s not the only sacrifice city employees will be required to make. They will also be asked to forfeit compounded cost-of-living adjustments that have been a driving force behind the city’s pension crisis.

Instead of getting annual, 3 percent cost-of-living increases compounded every year, they will get a simple, 3 percent increase or 50 percent of the consumer price index, whichever is less based on their first retirement check.

And they will get no increase in retirement benefits at all in 2017, 2019 and 2025. In addition, employees will be required to wait two years after retirement before becoming eligible for cost-of-living increases. That’s twice as long as they are required to wait today.

Last week, the Illinois House and Senate approved the mayor’s plan after Emanuel stripped out any reference to the $250 million property tax. That shifted the political burden to Chicago aldermen 10 months away from re-election.

Quinn, who had said “no can do” to the property-tax hike, has 60 days to act on the bill and has hinted he might take all of it.

To maintain union support even after the property-tax guarantee was dropped, the bill allows union leaders to sue the city and allows the state to withhold funding from Chicago if the city fails to make its required pension payments.

But the Anderson study noted that there’s a cap on that penalty. It’s one-third of state grants in 2016, two-thirds in 2017 and all grants in 2018 and beyond.

Days after unveiling his plan, Emanuel was in full spin mode when asked why a 29 percent increase in employee contributions would be legal under a state constitution that states pension benefits “shall not be diminished or impaired.”

“Nobody’s benefit gets cut. It continues to grow. It just doesn’t grow at the pace that it once did. … If you compare it to the old thing, you’d say it grows less fast. But it actually continues to grow,” the mayor said then.

“We’d make a change to the cost-of-living. [But] it continues to grow. You do contribute more, as [does] the public. Otherwise, the fund goes belly up and you don’t get one. I’ll tell you what a cut looks like—not getting a retirement check. That’s a cut. This guarantees you have a pension. Guaranteeing you have a pension vs. one that actually disappears. That’s a cut.”

As for the bitter pill that he’s asking Chicago homeowners to swallow, the mayor essentially argued that it could have been worse without pension reform.

“I don’t come to this lightly. I’m congenitally opposed to it. … [But] compare this to a 150 percent property tax [hike]—the largest in the history of the city, which I oppose—or massive service cuts and massive layoffs on the other side, which I oppose. … The other [option] I have is to leave it on course and allow it to go belly-up. Those are the three options that I think are unacceptable,” he said then.

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