Emanuel’s risky pension assumption forces city to borrow $220M
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Mayor Rahm Emanuel is using $220 million in “short-term bridge” financing — at a heavy cost to beleaguered Chicago taxpayers — to make a state-mandated payment to police and fire pension funds that’s higher than his tax-laden 2016 budget assumed.
Before raising property taxes by $588 million for police and fire pensions and school construction, aldermen eager to bite the bullet and get it over with demanded to know why Emanuel wasn’t proposing an even bigger increase instead of rolling the dice.
Aldermen were concerned about Emanuel’s risky assumption that Gov. Bruce Rauner would sign legislation — approved by the Illinois House and Senate, but not yet on the governor’s desk — giving Chicago 15 more years to ramp up to a 90 percent funding level for police and fire pensions.
Chicago taxpayers would still be on the hook for $619 million in payments to the two funds this year, more than double the city’s prior payment. But that’s $220 million less than the city would have been forced to pay and an $843 million break over the next five years.
The City Council’s questions turned out to be prophetic.
Earlier this month, Chief Financial Officer Carole Brown sent a letter to aldermen informing them that Emanuel had used a $220 million “short-term funding bridge” to make the higher police and fire pension payment due on that day.
That’s because the police and fire pension bill is caught up in the marathon state budget stalemate, and state law required the city to deposit the difference between current law and Emanuel’s risky assumption by March 1.
“This short-term funding bridge will be terminated by the city when Gov. Rauner signs” the bill, Brown wrote.
Civic Federation President Laurence Msall called the $220 million borrowing an “unfortunate, expensive, yet forseeable development” Emanuel should have anticipated by putting a “contingency plan” in place.
Instead of rolling the dice, Msall said Emanuel should have established a deadline for the governor’s signature on the bill that preceded the Dec. 29 deadline to send the city’s property tax levy to the county clerk. When there was no action by that date, the mayor should have cut expenses or asked the City Council to raise property taxes by an additional $220 million, Msall said.
“It would have been less expensive to raise property taxes by the amount necessary to fund this than it will be to use short-term debt or commercial paper that has to be repaid in one or two years. . . . They’re going to pay a larger interest payment for that borrowing — maybe as high as 8 or 9 percent. And they still have to come up with the $220 million principle they don’t have,” Msall said.
“In the past, the city has used long-term borrowing to roll short-term debt into a more manageable annual payment,” he said. “However, that would violate Mayor Emanuel’s pledge to eliminate scoop-and-toss. So, it’s likely to have to pay for this borrowing through existing budget cuts or other tax increases. There are no easy or inexpensive options. This is yet another bad sign of the financial distress the city is in [and] a very likely sign that next year’s budget will be even more difficult. The need for help from Springfield has never been more apparent.”
Budget Director Alex Holt said the city pays 2.5 percent to establish the line of credit and a 3 percent interest rate on the amount it draws. That’s nowhere near the 8.5 percent the Chicago Public Schools were forced to pay to salvage a $725 million borrowing.
Holt also disclosed that the $220 million has been deposited with City Treasurer Kurt Summers with instructions to make “short-term and mid-term investments” only.
“We’ve worked with the treasurer to earn interest, but not tie up the money long-term. Should the governor sign the legislation, as we expect him to do, we’ll be able to withdraw the deposit and repay the line of credit,” Holt said.
Holt said she understands Msall’s argument that the property tax increase approved by the City Council in late October should have been even higher.
But, she said, “We’re trying to balance the needs of our pension funds with the needs of our residents. The $550 million [increase] for one year and increasing over time was not sustainable for our taxpayers.”
What happens if the state budget stalemate drags on and the police and fire pension relief continues to be held hostage?
“It was part of the governor’s pension plan. It’s a true example of local control. It impacts the city only. We worked with the unions. There’s no reason he wouldn’t sign it,” Holt said of the governor.
“If it doesn’t get signed, we’ll obviously have to have an alternative plan,” she said. “What that alternative will be is up for discussion. I’m not worried about that at this point.”
But sources said trustees of the firefighters pension fund voted last week to send a demand letter to the city to release about $47 million dollars on deposit with the treasurer, so that it can be invested by the pension fund.
That action could make it difficult for the city to repay the short-term loans.
“The board at its March 16, 2016 meeting, was advised by fund counsel that under the Ilinois PUblic Funds Act, the city treasurer is required to forward the $47.1 million to the fund within 31 days,” Local 2 wrote in an email to rank-and-file firefighters and paramedics.
“For 2016, the fund has thus far received $65.4 million from the city excluding the $47 million on deposit with the city treasurers. The fund expects that it shall receive all $246 million in accordance with existing law,” Local 2 added.
Chicago Firefighters Union Local 2 President Tom Ryan and Ken Kacmarz of the Firefighter Annuity and Benefit Fund could not be reached for comment.
Ald. Pat O’Connor (40th), Emanuel’s City Council floor leader, said it was “difficult enough” to round up the 26 votes needed to pass the $588 million property tax increase, the largest in Chicago history.
Passing an $808 million property tax increase would have been “a very difficult road” and the wrong thing to do strategically, O’Connor said.
“We raised taxes to meet the budget. If we made the assumption that the state wasn’t going to meet its obligations, we would have let them off the hook. Clearly, they haven’t taken action. But you don’t raise taxes assuming they won’t do their jobs,” O’Connor said.
The city is expected to get more bad news on Thursday when the Illinois Supreme Court overturns Emanuel’s plan to save the Municipal Employees and Laborers Pension Funds. That will make the city’s financial crisis temporarily better but infinitely worse in the long run.