The “handwriting is on the wall” for Chicago’s plan to save two of four city employee pension funds, but Mayor Rahm Emanuel didn’t want to see it Friday.
Hours after the Illinois Supreme Court unanimously overturned state pension reforms, Emanuel argued that his plan to raise employee contributions by 29 percent and sharply reduce cost-of-living benefits to save the Municipal Employees and Laborers pension funds stands a better chance of survival.
He refused to discuss the “catastrophic outcome” that awaits Chicago if he’s wrong.
Also hanging in the balance are ongoing negotiations to save police and fire pension funds, which are in even worse shape than the other two.
Unless the Illinois General Assembly lifts the hammer, the city must decide by December how to fund a state-mandated, $550 million payment to shore up police and fire pension funds.
“Where the state basically did what they did arbitrarily, we negotiated with labor. That is a significant difference,” the mayor told the Chicago Sun-Times in the lobby of City Hall.
“Where they’re just trying to save money, we’re trying to preserve and protect the pensions in the way we structured it. And we think that last point as well as the first point are consistent with both the letter and spirit of the Constitution.”
And what if he’s wrong about that?
“I know that you would like to go to the more negative impact. But I don’t know [what to say about] `if not.’ That’s the position we’re gonna take. We believe there’s a degree of separation in how the state approached partners in labor, where we actually negotiated and didn’t do it arbitrarily,” he said.
A follow-up statement quoted Emanuel as claiming his plan “fully complies” with the Illinois Constitution.
Clint Krislov, an attorney representing active and retired city employees, countered that the “handwriting is on the wall.” The city pension reform bill will also go down in flames because the Illinois Constitution is clear: Pension benefits promised to government employees “shall not be diminished or impaired.”
“The city’s only real argument is something new they brought up: That they might not stand behind the pension plans and might let them go under. They’ve said that in our case before Judge Rita Novak. But I don’t think that will hold water. I don’t think Judge Novak will accept that,” Krislov said.
Krislov summarily dismissed the mayor’s argument that the city changes were “negotiated” while the state’s changes were dictated.
“There’s no contract that has been negotiated for these changes. What they got was apparently some unions who chose not to take it on. But if there’s a negotiated agreement to that effect, we’d like to see it. And the city has repeatedly asserted that the retirees are not part of the bargaining unit that unions represent. So unions don’t have the authority to compromise retirees benefits,” he said.
Civic Federation President Laurence Msall said the city has “viable and reasonable legal arguments it will raise” to defend its negotiated pension changes. But Friday’s ruling makes it an “uphill fight.”
“Options for saving the defined benefit plans are now clearly limited. But a constitutional amendment to clarify what future benefits can be changed is definitely in order, as is taxing retirement income and other changes to benefit state and local government,” Msall said.
At the earliest, the Illinois General Assembly could put a constitutional amendment on the ballot in November 2016. But even if it passes, it would affect only future retirees.
In the meantime, Msall said Emanuel should get to work with the new City Council on a cost-cutting and revenue-raising plan to fund pensions without jeopardizing essential services.
The combined, $30 billion pension crisis at the city and public schools has already dropped the city’s bond rating to just two levels above junk status.
“They have to get help from Springfield to maintain pensions, not make the situation worse, and look at future tax increases to fund these obligations while continuing to look for solutions to save the police, fire and teachers pension funds,” he said.
“There is no time in history when the city faced the enormity of such financial challenges at the same time the state was in an equally difficult position. . . . There will not be any politically attractive or easy answers.”
In a friend-of-the-court brief filed in January in the state pension case, City Corporation Counsel Stephen Patton warned that a “catastrophic outcome” awaits retirees and Chicago taxpayers alike if the city pension reforms are overturned. City liabilities would rise by $2.5 million a day, he said.
“The city will suffer further [bond rating] downgrades that could materially increase the cost of borrowing money essential to funding basic operations. And it could make the city immediately liable to pay hundreds of millions of dollars as a result of default and early termination of debt-related obligations,” Patton wrote.
As for the claim that the state made a promise to its employees that cannot be broken, Patton argued that “no Illinois or federal court has ever held” that there are “super contracts uniquely exempt from” the state’s police powers.
“Under [that] approach, pension benefits must be paid, no matter how catastrophic the result for current or future retirees, employees who would be terminated for lack of funds to pay them or municipal residents who would not receive adequate levels of basic services because all revenues are funneled into pensions. This turns the pension clause into a suicide pact,” Patton wrote.
The corporation counsel argued that “extraordinary circumstances justify the state’s exercise of its police powers” to avoid a “catastrophic outcome for the city and retirees alike.”
“Neither the city nor other municipalities has any feasible alternative to the police powers exception. If there is a `Plan B,’ we have not been able to find it,” Patton wrote.
The Chicago pension reform bill raised employee contributions by 29 percent — from 8.5 percent currently to 11 percent by 2019 — and ended compounded cost-of-living adjustments for retirees ineligible for Social Security that have been a driving force behind the city’s pension crisis.
The city started collecting the higher payments on Jan. 1. But the money had been put in escrow pending the outcome of the legal challenge.
Emanuel initially proposed raising property taxes by $250 million over five years to bankroll the city’s increased contribution to save the two funds.
He agreed to substitute a 56 percent increase in Chicago’s telephone tax for the city’s first-year contribution, only after then-Gov. Pat Quinn balked at a pre-election property tax hike.
The mayor has refused to say how he plans to meet the city’s increased obligations to the two funds after the first year, when the telephone tax will fall short.
Now more than ever, Chicago’s financial fate lies in the hands of Gov. Bruce Rauner and the Illinois General Assembly.
The mayor wants a publicly owned Chicago casino, with all of the revenue used to shore up police and fire pensions.
He wants to resurrect his 2011 proposal to broaden the sales tax to an array of services not now covered, an idea that Rauner has also championed.
And he wants the governor and Democratic-controlled General Assembly to lift the hammer hanging over Chicago taxpayers and give taxpayers more time to “ramp up” to the balloon payment for police and fire pensions.
To erase a $1.14 billion shortfall and $9.5 billion pension crisis at Chicago Public Schools, Emanuel has appealed to Rauner to end the pension double-standard that forces Chicago taxpayers to pay twice, for retired city teachers and for the pensions of retired teachers outside the city.