Phone tax won't keep $20B pension bill on hold for long

SHARE Phone tax won't keep $20B pension bill on hold for long

Mayor Rahm Emanuel did what he had to do to convince Gov. Pat Quinn to sign on the dotted line.

But chances the mayor and City Council can solve Chicago’s $20 billion pension crisis without raising property taxes range between slim and none.

A 56 percent increase in Chicago’s telephone tax buys time to appease Quinn and get past the Nov. 4 gubernatorial election and the Feb. 24 city election for mayor and aldermen.

But it’s a Band-Aid that produces nowhere close to the $750 million in property tax collections the mayor had hoped to generate over five years to save the Municipal Employees and Laborers Pension funds, let alone make a looming, $600 million payment to shore up police and fire pension funds in even sorrier shape than the other two. There’s also the teachers pension fund that must be saved.

Former Mayor Richard M. Daley had a political phobia to raising property taxes that prompted him to freeze them for 17 of his 22 years in office.

In fact, Daley once diverted city payments from Municipal Employees and Laborers pension funds, then flush with cash, to provide a pre-election property tax cut.

The result is that Chicago property taxes are unrealistically low when compared with rates for the similarly sized home in most suburbs.

“The perception for people in Chicago is that the property tax is already too high. But the reality is, because of property tax classifications in Cook County, property taxes and tax rates are higher in the suburbs and collar counties,” said Donald Haider, former city budget director and mayoral candidate, who is a professor of management, strategy and social enterprise at Northwestern University’s Kellogg School of Management.

Emanuel is well aware of the conflict between perception and reality, which is why he turned first to the property tax to match reforms that increased employee contributions by 29 percent and reduced employee benefits to save the Municipal Employees and Laborers pension funds.

When Quinn said “no can do” and threatened to veto the bill, even after language mandating a property tax hike was stricken, Emanuel had no choice but to take a property tax increase off the table for the first year and default to the phone tax.

But aldermen and watchdogs questioned by the Chicago Sun-Times acknowledged that the freeze won’t last.

“Chicago will need to come up with a combination of new revenue. Yes, including the property tax, but not necessarily exclusively property tax, and savings from efficiencies and some cuts in order to make its now statutorily-required increased payments to the Municipal and Laborers funds,” Civic Federation President Laurence Msall wrote in an email to the Sun-Times.

Ald. Ameya Pawar (47th) said a property tax freeze “might be something you can get away with short term. But, in the long term, it’s almost certain that a property tax increase is coming,” particularly to deal with police, fire and teacher pension funds.

Haider said the political accommodation between Quinn and Emanuel is merely “playing out the election cycles” in a “game with dire consequences” that will end with a post-election property tax increase.

“I don’t see any other revenue alternative for a problem of this magnitude. Whether it’s for the two funds [Municipal Employees and Laborers], the teachers or police and fire, some portion of this is gonna fall on the property tax, if not the majority. The preponderance, in all likelihood,” Haider said.

“The other options are either not doable or not sustainable. They’re one-time revenues. They’re uncertain as to legality. They do not provide the yield and predictability of property taxes,” Haider said.

Another City Hall source, who asked to remain anonymous, agreed.

“After the election, they’ll pass a massive property tax increase that’ll cover fire, police and everything else, and people will be taxed to the hilt. That’s the only alternative. They’ve got to set a higher base and tie it to the cost of living [going forward]. Daley should have been doing it a little bit every year, but he didn’t,” the source said.

Even if Emanuel can convince a lame-duck General Assembly to lift the $600 million hammer hanging over Chicago taxpayers during the veto session, pressure to raise property taxes to shore up police and fire pension funds will be exacerbated by the reality of those contracts.

Police officers and firefighters get simple, 1.5 percent cost-of-living adjustments. They don’t get the compounded cost-of-living increases targeted to produce so much of the savings for the Municipal Employees and Laborers pension funds.

That means you can increase employee contributions, raise the retirement age to 57 and base pension payments on the best eight years of earnings, instead of the highest four years, and still come up short. Most of the money will have to come from Chicago taxpayers.

“When you throw in a solution to the teachers pension crisis, it’s a bit of a shell game to avoid a property tax hike. The best-case scenario is you get out of Dodge for one year,” another source said.

Emanuel’s best hope of avoiding a massive property tax increase appears to lie in a statewide solution to the statewide problem of police and fire pensions.

If he can somehow convince the General Assembly to broaden the sales tax umbrella to include services and earmark the windfall to police and fire pensions, maybe then he could do what Quinn has asked him to do.

Earlier this week, the mayor refused to say whether he would resurrect the service tax idea he raised during the campaign, only to drop it like a hot potato after it was derisively branded the “Rahm tax.”

But, last month, Budget Director Alex Holt embraced the idea.

“The mayor has been clear on the fact that the way the sales tax is implemented today hurts people buying basics but does not tax luxuries. We need to take a wholesale look at the structure of the commodity-based sales tax that charges the basics people need,” Holt said then.

But, she warned, “If the state were to make that kind of move, it would take some time to do that restructuring. It’s a long-term project. It’s not an immediate project.”

Haider said a “whole range of things become possible” after the gubernatorial election, including making permanent a temporary increase in the state income tax, as Quinn has suggested, and restoring the local share.

As for Emanuel, he said, “In hindsight, we’re all geniuses. But, if you were to start over again on the four years, you would have front-ended this and reordered your agenda to take on pensions and school closings” first.

“Politically, do you want to take on this humongous tax increase in an election year? But, in the long run, you’re gonna have to do it,” he said.

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