On the eve of a crucial Finance Committee vote, Mayor Rahm Emanuel released an actuarial analysis in hopes of proving to aldermen that his 29.5 percent tax on water and sewer bills will be enough to save the largest of Chicago’s four city employee pension funds.
It didn’t work with the anti-Emanuel Progressive Caucus that demanded the study of the mayor’s plan for the Municipal Employees Pension Fund weeks ago and was miffed about getting it hours before the vote.
“The numbers just don’t add up . . . In 2023, there will be a pretty huge gap. There’ll have to be some other source to pay for that gap,” said Ald. Scott Waguespack (32nd).
“It’s an unfortunate move to wait this long. That’s the concern — that they’re just trying to rush something through without taking a serious look at it . . . A lot more individuals in the Council are feeling that kind of pressure that’s been building up over the years starting with the parking meter deal.”
Civic Federation President Laurence Msall said the analysis shows that the infusion of $1 billion in new revenue from the new utility tax by 2023 will put the city’s largest pension fund in a “significantly better place.”
But Msall noted that even with that windfall — and continued contributions from property taxes, the corporate fund and enterprise funds that support operations of O’Hare and Midway Airports as well as the city’s water and sewer systems — the condition of the pension fund will continue to drop over the next five years with “more benefits going out than coming in.”
“It will require additional money beyond the utility tax in the out years unless other changes occur, including the rate of return,” he said.
Budget Director Alex Holt and Chief Financial Officer Carole Brown acknowledged that increased funding will be needed after the “ramp-up” to a so-called “actuarially required contribution.”
But that doesn’t necessarily mean that the sky is the limit for the mayor’s tax on water and sewer bills.
“The reality is that, yes, we’re gonna need more funding. We’re gonna need more funding for police pensions and police salaries, too, provided the cost of government continues to grow,” Holt said.
“We will continue to provide those increases through a combination of reforms, savings and revenue. I don’t see pensions being any different than the balancing we already do to pay for all of the services we provide.”
Noting that the 29.5 percent tax on water and sewer bills would be phased in, Holt said, “It’s the growth over four years that gets us to the ramp. At the end of that period, there will need to be further savings or further revenue to fund the ongoing increase. There is room for further increasing the water-sewer tax. But there are other possibilities as well. The mayor has been big on further benefit reforms. Those may produce future savings. There are other options as well. Going from contributing $1 billion in six years to $3 billion in six years should help investment returns and allow them to not have to spend so much of their assets on benefits.”
Brown noted there is “more capacity there for additional increases” in the utility tax beyond the four-year phase-in Emanuel anticipates.
“What’s different and really remarkable is that . . . we have identified — just as we have for police, fire and laborers — a path to solvency. A funding source that has capacity that’s stable and recurring,” she said.
“It will be the law that the city must contribute at an actuarial level. And we are proposing benefit reforms for new hires that, for the first time, will approximate the cost of the benefit.”
The report prepared for the city by Aon Hewitt shows how the city plans to contribute $3 billion to the Municipal Employees pension fund over a six-year period. That’s three times more than Chicago taxpayers provide under current law.
The proposed funding plan assumes that the city would continue to contribute $124 million in property tax revenue to the fund each year, along with a $109 million contribution from the city’s corporate fund.
The share of funding from enterprise funds used to operate O’Hare and Midway and the water and sewer systems would grow from $42.7 million next year to $140.6 million in 2022, the first year of the ARC.
That growth is realistic at O’Hare and Midway because of additional revenue expected to be generated by concession agreements currently out for bid and by additional concession space created by terminal expansion, officials said.
The Finance Committee is scheduled to vote on the mayor’s plan on Thursday.
Aldermen will also be armed with a report by their own financial analyst, Ben Winnick, about the assumed rate of return on investments for a Municipal Employees Pension fund with $18.6 billion in unfunded liabilities that’s due to run out of money in 2025.
“The . . . current assumed rate of return is 7.5 percent. The rate is in line with the average rate used by public pension systems across the country and is in line with the long-term rate of return that the fund has received,” Winnick wrote in a memo to aldermen.
“However, given more recent experience and a prolonged term of low interest rates, it would not be unreasonable for the fund’s board and its actuaries to make a determination that a lower assumed rate of return is more appropriate. But maintaining the existing rate is likely justifiable.”