Chicago property owners will face $250 million in property tax increases over five years while city employees make increased pension contributions that will cost them at least $300 more a year, under landmark reforms unveiled Monday.
Three days after the Chicago Sun-Times disclosed that Mayor Rahm Emanuel was closing in on a pension deal with unions whose 31,000 active employees and 19,000 retired members look to the Municipal and Laborers pension funds for their retirement benefits, the mayor’s team used a divide-and-conquer strategy to seal the deal, setting the stage for approval by the Illinois General Assembly.
The agreement that could strengthen Emanuel’s hand with police and fire unions’ calls for Chicago property owners and city employees to share the pain.
The new revenue the mayor had promised only after pension reform will come in the form of $50 million property tax increases for five straight years, beginning next year and continuing through 2019.
Top mayoral aides estimate that would cost the owner of a home valued at $250,000 with an annual property tax bill of $4,000 roughly $58 more or $290 over the five-year period. That’s on top of expected increases for the Chicago Board of Education and Chicago Park District.
City employees who belong to roughly 30 white collar and building trade unions would see their annual pension contributions rise by one-half of one percent over the same 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.
Based on an average salary of $60,000, the increased contribution is expected to cost employees $300 more-a-year.
But, 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, three percent cost-of-living increases compounded every year, they will get a simple annual 3 percent increase on the original benefit or 50 percent of the consumer price index, whichever is less.
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.
There would be no change in the retirement age for city employees hired prior to Jan. 1, 2011. Workers hired after that date would see their retirement age reduced — from 67 to 65.
The bottom line, according to Emanuel, is a plan that spreads the burden between employees, retirees and homeowners without raising property taxes so high that it triggers a mass exodus to the suburbs.
The mayor, who faces re-election in less than a year, acknowledged that there is political risk in raising property taxes for five straight years just to shore up two of the four city employee pension funds.
“The worst thing I can do is put my political future ahead of the city’s future,” the mayor said.
“I’m not naïve … I understand there’s political risk here for me. I get it. But, it pales, trust me, compared to what would happen to the city if we didn’t solve this problem in a way that I think is respectful to working men and women in the city who need a retirement and now will get one.”
If Emanuel can convince the General Assembly to approve the pension deal with building trades and white collar employees, it could leave police and fire unions on the outside looking in.
Next year, Chicago is required by state law to make a $600 million contribution to stabilize police and fire pension funds that have now have assets to cover just 30.5 percent and 25 percent of their respective liabilities.
The mayor wants the General Assembly to put off the balloon payment until 2023 to give him time to negotiate a similar deal with police and fire unions.
Now that the mayor is turning to higher property taxes to shore up two pension funds that represent 53 percent of the city’s unfunded pension liability, the question is what revenue source is left for police and fire.
On Monday, Emanuel repeatedly refused to answer that question.
“I’m not gonna go into the unknown. I haven’t had that conversation, so I can’t tell you. You’re asking me to negotiate against myself. … I can’t do that. … Before we get there, I have a piece of legislation I’ve got to pass,” he said.
“This was the biggest thing that was out there of uncertainty. Workers never knew whether they were gonna get the pension. Taxpayers thought they were gonna be stuck with a huge bill or we were gonna lay off thousands of workers and slash many, many services to people. … Everybody now is eliminating risk and everybody now is getting certainty.”
The mayor was asked what message he wants to send to police and fire unions left standing at the station as the pension reform train pulls out.
“Anybody that’s walked into the office ready to find common ground, we’ve walked out with a common understanding. … The door is always open. Sleeves are rolled up, ready to go to work. We can’t delay. If you have an idea on how to find that common ground, [he’s all ears]. If everybody gives something, then nobody has to give everything,” the mayor said.
As bitter as the pill will be for city employees and retirees to swallow, it pales by comparison to the reforms the mayor himself suggested when he went to Springfield two years ago.
That plan, which blind sided and infuriated union leaders, included: a 10-year freeze in cost-of-living increases for retirees; a five-year increase in the retirement age; a five-percent increase in employee contributions and a two-tiered pension system for new and old employees.
The Sun-Times reported last week that the talks with white collar and building trades unions heated up last month after Moody’s Investors dropped Chicago’s bond rating another notch, citing “massive and growing unfunded pension liabilities” that “threaten the city’s fiscal solvency” without “major revenue” and budget cuts in the near term and for years to come.
The drop — from A3 to Baa1 with a negative outlook — came eight months after Moody’s cited the same concerns in ordering an unprecedented triple-drop in the bond rating that determines city borrowing costs.
“Moody’s has taken an extreme position. And while… we should not be managed by rating agencies — we should be managing on what is the best interest of our taxpayers and participants — the rating agencies have a seat at the table because they are forcing certain decisions and reducing our flexibility,” said a top mayoral aide, who asked to remain anonymous.
“Our ability to continue to maintain the quality of service and the level of infrastructure we need is greatly impaired when they take these draconian positions on our ratings. We disagree with them on it. But, that’s the position they’ve taken.”
The Civic Federation called the mayor’s pension proposal a “not perfect” but “reasonable proposal” that shares the sacrifice among city employees, city government and taxpayers.
“It provides for important cost-cutting benefit reforms long sought by the Civic Federation such as the elimination of the compounded COLA increases and it injects new revenues into both funds,” said Laurence J. Msall, the organization’s president.
“The situation is dire – the city’s pension funds are in a death spiral and if urgent action is not taken immediately it will be impossible to save them. … We urge the General Assembly to swiftly take up these reform measures.”
But the mayor was already facing opposition from the coalition of unions representing teachers, nurses, police officers, firefighters and other city workers.
“The city’s proposal is an unconstitutional approach that makes onerous cuts to the pension benefits of nearly 50,000 active and retired public servants,” according to a statement from the We Are One Chicago union coalition.
“In addition, the city’s plan would require all current employees to pay an additional 2.5 percent of their salaries — beyond the 8.5 percent they already contribute — for this greatly diminished benefit.
“The proposal has even more problems. Although the city claims it will increase employer contributions, it does not identify a new revenue stream or provide any assurance that sufficient revenue will be available to make full pension payments. … We urge the Mayor and the city to engage in renewed discussions to negotiate a truly fair, constitutional solution, rather than pursue this flawed proposal any further.”
The mayor’s plan calls for 70 percent of the money to come from the city, 9 percent from employees and 21 percent from benefit reforms.
Roughly 30 percent of the city’s contribution would be paid by “appropriately allocating” increased pension costs to the Aviation and Water funds based on the number of employees whose work is tied to those funds. Another 20 percent would come from savings generated by phasing out the city’s 55 percent subsidy to retiree health care and other budget savings.
The mayor’s plan is expected to be introduced in the coming days in Springfield.
Emanuel has now cut pension deals with Chicago Park District unions along with two of the four city employee pension funds. The only exceptions are police and fire unions. Teachers also have yet to reach their own deal with Emanuel’s hand-picked Board of Education.