Mayor Rahm Emanuel’s risky and erroneous assumption that Gov. Bruce Rauner would sign legislation giving the city 15 more years to ramp up to a 90 percent funding level for police and fire pensions cost beleaguered Chicago taxpayers $1.38 million, City Hall disclosed Friday.
That’s how much it cost the city to use $220 million in “short-term bridge” financing to make a state-mandated payment to police and fire pension funds that was higher than Emanuel’s tax-laden 2016 budget assumed.
The mayor’s assumption turned out to be dead wrong.
For months, Democratic legislative leaders held the police and fire pension bill in a cat-and-mouse game to prevent the governor from holding it hostage. That forced Emanuel to borrow money to cover a state-mandated payment to police and fire pension funds due with the city treasurer in March.
When the already-approved bill was finally sent to the governor’s desk as the spring legislative session was drawing to a close, Chicago’s worst fears were realized.
Instead of signing it or doing nothing and letting it take effect automatically, Rauner vetoed the legislation, infuriating his old friend, the mayor.
The governor justified that veto by claiming it merely “kicked the can down the road” by allowing the city to borrow $843 million from the two funds at an interest rate of 7.75 percent, saddling taxpayers with an additional, $18.6 billion burden.
Three Republican crossover votes in the Illinois House then helped Emanuel override the governor’s veto, staving off yet another property tax increase.
It was a stunning victory that Emanuel had burned the phone lines to achieve. Just days before, top mayoral aides had described the chances of an override in the House at 50-50 at best.
On Friday, City Hall responded to a Chicago Sun-Times question about the borrowing by disclosing that the $220 million in borrowed money had been repaid—at a cost.
“The cost of the short term funding bridge was approximately $1.38 million, which includes the investment returns of $344,000,” said Molly Poppe, a spokesperson for the city’s Office of Budget and Management.
Civic Federation President Laurence Msall called the $1.4 million in interests costs an “unfortunate” and “avoidable” expense.
“There should have been a contingency plan for this [that averted the need to borrow]. The governor said all along he wouldn’t sign this bill. The loss of $1.4 million is not an insignificant amount. It could have been avoided and used for city services or other important investments,” Msall said Friday.
Earlier this month, Moody’s Investors Service used an argument similar to the one the governor made to describe Emanuel’s political victory over Rauner as a “credit negative.”
“While the new law does provide short-term budget relieve by reducing these pension plan contributions by $220 million, Chicago pension contributions will now fall far short of amounts needed to curb growth in its unfunded pension liabilities, a credit negative. By paying less now, Chicago risks having to pay much more later,” Moody’s wrote in its new Weekly Credit Outlook for Public Finance.
The veto override give Chicago 15 more years – until 2055 – to ramp up to full funding of police and fire pensions that now have assets to cover just 26 and 22.7 percent of their respective liabilities.
According to Moody’s, that means the city’s contributions to the two funds will be “insufficient to cover interest accruing on accumulated unfunded pension liabilities to continue growing.”
Based on current actuarial assumptions, Moody’s estimated that the unfunded liabilities of both plans will “now increase for almost 20 years, growing $3.3 billion over their reported year-end 2014 values.”
“If plan investment returns do not meet return assumptions, the risk of greater cost growth increases,” Moody’s said.
The report noted that 2015 investment returns for all four of city’s pension funds “ranged from -1.5 percent to +1.8 percent.” That’s “far below assumed returns” of 7.5 to 8 percent.
“Additional weak investment performance would increase the city’s pension payments over current projection, creating additional operating stress and forcing Chicago to make difficult budgetary decisions,” the report states, noting that a “credit negative does not connote a rating or outlook change.”
The mayor’s office countered by accusing Moody’s of ignoring all of the progress Emanuel has made to “confront fiscal challenges that had built up over 40 years.”
The statement claimed that progress includes: reducing the city’s structural deficit by $421 million; establishing plans that identify “sustainable revenue” to save three of four city employee pension funds and phasing out or ending “financial engineering” gimmicks that former Mayor Richard M. Daley used to “mask the true cost of government.”
“We refuse to apologize for not asking Chicagoans to take on another $800 million in property taxes just because Moody’s feels that we are not moving fast enough,” the statement said.
“Not overburdening our residents takes priority over appeasing Moody’s, which seems to have a desire to hurt Chicago, rather than help it thrive.”
It was the second time in a week that a Wall Street rating agency had taken a dim outlook of the veto override. Standard & Poor’s had already raised similar concerns.