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After putting final budget to bed, Rahm to confront the ‘elephant in the room’

City Hall (left) and Board of Trade (rear)

Chicago City Hall, with the Chicago Board of Trade building in the distance. | Colin Boyle/Sun-Times

Now that Mayor Rahm Emanuel has put his $10.7 billion feel-good final budget to bed, he’s gearing up for a stare down with what the Civic Federation has called the “enormous elephant” in the room.

On Dec. 12, Emanuel has promised to lay out “options” to slay or, at the very least shrink, the elephant: a looming, $1 billion spike in pension payments.

Asked to preview that pension plan, the mayor would only say there would be “a lot of different parts” and that it would be remembered for its “honesty with the public.”

“The reason we are in the challenge we’re in is because we were never — going back decades — ever honest. Not honest to the retirees what the benefits really cost. Not honest with the taxpayers of what had to happen,” he said.

“I’m gonna lay out where we were, where we are, how those numbers are, what are the steps, what is the honesty about those steps because … it’s gonna take a series of steps and a multi-faceted approach to meet the challenge.”

The solution the mayor seeks is almost certain to include $10 billion in “pension obligation bonds” tailor-made to minimize the need for another punishing round of post-election tax increases.

ANALYSIS

Never mind that the Wall Street credit rating agency Standard & Poor’s has warned pension obligation bonds “in environments of fiscal distress or as a mechanism for short-term budget relief” could threaten Chicago’s BBB+ bond rating.

After a five-year ramp to actuarial funding ends, Chicago taxpayers will be on the hook to keep city employee pension funds on the road to 90 percent funding.

By 2023, the city’s contribution to all four funds will nearly double, from $1.2 billion this year to $2.1 billion, according to the city’s annual financial analysis.

Chief Financial Officer Carole Brown has argued repeatedly and vociferously that the $10 billion borrowing makes “financial sense if we can achieve the right rate” of interest.

“Whether or not we do this, the next administration will be faced with how to pay more than $277 million in pension payments next year. It’s what they’re gonna be looking at when they do their 2020 budget,” Brown has said.

“If we can come up with a financially sound way to stabilize our pension funds while we still make contributions, but make those contributions more manageable over time and lower the cost of funding our pensions, I don’t know why we wouldn’t consider it. Which is why the mayor is still considering it.”

Emanuel initially planned to rush the $10 billion borrowing through the City Council in September — before introducing his final budget. The timing was altered after he pulled the plug on his own re-election bid.

Mayoral candidate Paul Vallas has portrayed the pension borrowing as a financial “straightjacket” that will tie the next mayor’s hands.

Municipal finance experts have also raised concerns, pointing to pension-bond defaults in Detroit, California and Puerto Rico.

They wonder what would happen if the market tanks and what specific city revenue would be used to back the bonds, now that Emanuel has isolated sales tax revenue in a special fund and used that “securitization” structure to refinance $3 billion in city debt.

It’s unclear how Emanuel plans to get around those concerns, which are shared by his closest City Council supporters.

Equally uncertain is what, if any, other steps the outgoing mayor will recommend.

He is unlikely to suggest more tax increases after pushing through a $2 billion avalanche of tax hikes and taking pains to craft a final budget that spares his City Council allies from yet another difficult vote as they prepare to face an angry electorate next year.

The only obvious alternative to tax hikes is to rely on the jackpot of revenues from a still-elusive Chicago casino and from Gov.-elect J.B. Pritzker’s promise to legalize recreational marijuana.

Vallas and mayoral candidates Gery Chico and Willie Wilson are all counting on both windfalls to minimize the need for post-election tax increases or avoid them altogether.

So far, Vallas is the only candidate to acknowledge the need for $250 million more in property tax increases over the next five years. He also wants to cap future property tax increases at 5 percent.

Vallas has also called for creating a “third-tier pension program” requiring one-third of all city employees — those earning more than $100,000 a year — to contribute more toward their pensions and health insurance.

He would further squeeze the city’s unionized employees by negotiating “revenue-based labor contracts” that tie future pay raises to available city revenue.

“I’m not begrudging people a fair wage. But we’ve got … to look at those individuals making those higher salaries, and we’ve got to ask them to pay more,” Vallas told the City Club of Chicago last month.

“These are the sacrifices … so we can solve this problem once and for all … People will make sacrifices when they know what the destination of that journey is. They won’t make sacrifices when there is no plan. Then, they close ranks and protect what little they have.”

Jeff Johnson, a trustee of the Municipal Employees pension fund, has warned that Vallas’ proposal to increase contributions for high earners beyond the 8.75 percent they pay now stands little chance of passing legal muster.

Tying future wage hikes to available revenues may resemble the way it’s done in the private sector, but it’s “not the government model for how you negotiate a union contract,” Johnson has said.