Pension fix: 28 percent water/sewer tax, phased in over 4 years
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Mayor Rahm Emanuel on Wednesday put in place the final piece of the pension puzzle he was elected to solve but in a way that will impose another heavy burden on Chicago homeowners reeling from rising property taxes compounded by reassessments.
To generate the $239 million over five years needed to save Chicago’s largest city employee pension fund, Emanuel wants to slap a new and quickly escalating “utility tax” on water and sewer bills over the next four years.
The plan is to start with a 7 percent tax, double it in year two, impose a 21 percent tax in year three and end at 28 percent in years four and five.
After that, the tax would rise annually to meet the “actuarially required contribution” to achieve a 90 percent funding ratio by 2057 for a Municipal Employees pension with $18.6 billion in unfunded liabilities that is due to run out of money in 2025.
The average Chicago household currently pays $686.04 a year for water and sewer services that use 7,500 gallons of water.
City Hall maintains that the new tax can be enacted by the City Council in September under the city’s sweeping home-rule power and does not require state legislative approval. It is expected to cost the average homeowner $4.43 more month or $53.16 a year in 2017. In the fourth year, the added tax burden will be $225.96 a year.
The mayor pitched the plan to a conference of bankers and individual investors on the stage of the Symphony Center in the South Loop.
It may have been music to the ears of those who purchase Chicago bonds at a time when the pension crisis has saddled the city with a junk bond rating shared only by Detroit among major cities.
But it will undoubtedly be just the opposite for homeowners who will see the city’s property tax levy double under Emanuel’s leadership and the aldermen who represent them.
“I’m not saying this is not tough. It is tough . . . But the Council has always stepped up for Chicago’s future and I’m absolutely confident they will step up and be part of that solution so that, once and for all, the bow can be tied as it relates to the pensions,” Emanuel said.
Civic Federation President Laurence Msall said it’s a “positive and politically reasonable step” to try to “use water fees” instead of raising property or sales taxes that would only compound the “high tax situation that already exists.”
But he’s not at all certain that it’s a permanent solution to funding the city’s largest pension fund.
“It’s a creative and brave effort by the mayor but it will require continued monitoring. We have not seen the actuarial detail to prove” the tax will generate enough money “in the longer term,” he said.
A property tax increase based on the value of a home would have been less regressive than a tax on water and sewer bills based on water usage needed to live.
Although it’s known as the third rail of Chicago politics, a property tax hike would have had the added advantage of being deductible on federal taxes for homeowners.
But Emanuel said he was determined to steer clear of a third straight property tax increase for fear of triggering an exodus to the suburbs.
Aldermen emerged from closed-door briefings on the mayor’s plan with a sense of resignation.
They were not happy about being asked to walk the political plank — again — in a way that could hand aldermanic challengers a campaign issue and ultimately cost incumbents their City Council seats.
But they were prepared to do what’s necessary because the alternative is worse.
It would mean allowing a pension fund with 71,000 members, including aldermen, to go bankrupt and paying retirees their benefits on a pay-as-you go basis. That would take an additional $900 million to $1 billion per year.
“The alternative is catastrophic . . . If we don’t bite the bullet today there’s a much bigger problem in nine years,” said Ald. Ameya Pawar (47th).
Ald. Anthony Beale (9th), chairman of the City Council’s Transportation Committee, said the utility tax on water and sewer services is “being proposed” by the mayor, but it’s not “set in stone.” Aldermen are searching for alternatives that would not require lowering the boom on homeowners again.
“I’m actually making a proposal that, long term, we look at putting a toll on all the expressways coming in and out of the city. If we looked at something like that, we could actually repeal a lot of the taxes and fees we’ve put in place over the years. That much income could be generated,” Beale said.
The agreement announced Wednesday also includes employee concessions that mirror the terms of the deal that saved the Laborers Pension fund and replaced an agreement struck down by the Illinois Supreme Court.
Shortly after taking office, Emanuel doubled water rates over a four-year period — followed by annual increases to match the cost of living — to rebuild Chicago’s crumbling water and sewer system. That water bill has now become a catch-all for two other fees: the $9.50-a-month garbage fee and the proposed utility tax for pensions.