Emanuel eyes utility tax increase to save largest pension fund

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Mayor Rahm Emanuel introduces City Budget Director Alexandra Holt to the City Club of Chicago on Monday. Both touted the city’s improved fiscal situation. | Rich Hein/Sun-Times

Unwilling to hit property owners for the third time in one year, Mayor Rahm Emanuel plans to raise the city’s utility taxes to save the largest of Chicago’s four city employee pension funds, City Hall sources said Monday.

Chief Financial Officer Carole Brown acknowledged that the city needs “in the ballpark” of $250 million to $300 million in new annual revenue to shore up a Municipal Employees Pension fund with 71,000 members and $18.6 billion in unfunded liabilities.

Yet another property tax increase would be the easiest and most reliable route to go, but top mayoral aides disclosed Monday that Emanuel has ruled out going back to that same well for fear of piling on.

Last fall, Emanuel persuaded a reluctant City Council to raise property taxes by $588 million for police and fire pensions and school construction. He has agreed to raise property taxes by $250 million more for teacher pensions.

A sales tax increase would have been the natural fallback if County Board President Toni Preckwinkle hadn’t beaten Emanuel to the punch.

The only other tax option in the city’s home-rule arsenal capable of generating such a vast sum of revenue is the utility taxes.

This year, utility taxes and fees on electricity, natural gas and telecommunications will bring in about $441 million — that’s 12 percent of all corporate fund revenue.

City Budget Director Alexandra Holt speaks to the City Club of Chicago on Monday. | Rich Hein/Sun-Times

City Budget Director Alexandra Holt speaks to the City Club of Chicago on Monday. | Rich Hein/Sun-Times

After a luncheon address to the City Club of Chicago on Monday aimed at touting the progress made to right the financial ship, Budget Director Alex Holt refused to say where Emanuel would find the massive sum needed to save the Municipal Employees pension fund.

“Everything’s on the table and we’ll hopefully be in the position of announcing both the benefit reforms and the funding plan in the coming weeks,” Holt said.

“We’ve got to look at every possible source,” she said. “This is about solving a long-term problem and making sure that we’ve got funding sufficient to do that.”

Brown read from the same script. “Everything is on the table and we’ll be telling you our solution shortly,” she said. “We’re looking at every option. The mayor is committed to putting forth a solution for the Municipal Fund. Right now, we’re publicly considering everything.”

What about a utility tax hike?

“I’m not in a position to comment on that right now,” Brown said.

Pressed to say precisely how much new revenue is needed, Brown said, “We haven’t concluded the ramp. But it’ll be a ramp similar to what we proposed for Laborers. I don’t have the numbers off the top of my head, but it’s within that ballpark” of $250 million to $300 million a year.

Emanuel gave no hint of the painful tax increase ahead as he introduced Holt to the City Club. Instead, the mayor bragged about having the smallest operating shortfall in a decade; about having identified recurring revenue sources to save three of the city’s four pension funds; and about the deal he’s about to announce to put the fourth and largest employee pension funds on a long-term road to solvency.

“For the first time, you can actually see the other side of the riverbank,” on pensions that were the “dark cloud” hanging over Chicago when he took office in 2011, Emanuel said.

Afterward, the mayor made no apologies either for the massive burden already imposed on Chicago taxpayers or for the other shoe that’s about to drop.

“I didn’t create this problem. We inherited a problem. Every one of the four pensions for the city — police, fire, laborers and municipal — were financially on a track to being insolvent, which means retirees were not gonna get the paycheck,” Emanuel said.

“We were not honest. The whole system wasn’t honest. The city didn’t contribute the honest amount,” he said. “Workers were not contributing the honest amount, and we winked at the public, yet left them with a problem because nobody had the leadership to be honest.”

He added, “Everything we’ve done painstakingly over the years — whether on the operating budget or with the pensions — is what does it take to solve the problem, but allow the economy to still grow? . . . I don’t make light of this. But we had to solve the problem. And we do it in a way that’s fair.”

Ald. Joe Moore (49th), one of Emanuel’s staunchest City Council supporters, said he’s not happy about the prospect of raising the “inherently regressive” utility taxes.

But he said, “An argument can be made that we need to give the property taxpayer a rest for a while before we go back to that well.”

He added: “We have to continue to close our structural deficit and we have a yawning gap in our pension obligations that we need to close. We need to come up with something. . . . Like last year, it’s a range of choices that go between bad and worse. We have to pick our poison.”

Civic Federation President Laurence Msall noted that the amount of money the city would have to contribute to make the “actuarially determined contribution” needed to put the city’s largest pension fund on solid footing is $961.8 million. That’s compared to the projected actual 2016 contribution of $153.1 million.

That amount would likely be lowered by: a five-year ramp; a goal of 90 percent funding, instead of 100 percent; a plan to increase funding over a 40-year period instead of 30 years; and “funding on a level percentage of pay, rather than a level dollar,” Msall said.

“All of these would lower the amount the city has to pay in the short-run from the total . . . nearly $1 billion. However, no matter what, the contribution under such a deal would still be much, much higher by hundreds of millions than current contribution levels,” he said.

“There are very few, if any, sources of revenue that could bring in that much money,” he added.

The landmark agreement to save the largest of Chicago’s four city employee pension funds is expected to mirror the deal that saved the smallest after an earlier agreement to save both funds — in a way that required more from employees, but less from taxpayers — was struck down by the Illinois Supreme Court.

Both agreements still need to be ratified by the Illinois General Assembly.

Chicago imposes several different categories of utility taxes. Most have rates controlled by state statute.

That means legislative approval would likely be required, just as the telephone tax increase used to save the Laborers pension fund needed sign-off from the Illinois General Assembly.

The Natural Gas Utility Tax has an 8 percent limit for cities with population over 500,000. Chicago has already hit that ceiling.

The electricity use tax and infrastructure maintenance fee also are limited by state statute. Telecommunications taxes and fees are controlled by state statute and are not subject to home rule.

According to Civic Federation researchers, the Natural Gas Use Tax appears to be a home rule tax imposed at a rate of $0.063 per therm to generate $37.1 million in 2016. If so, it could be raised without state approval.

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