Chicago Mayor Rahm Emanuel took the first step toward possibly borrowing $10 billion to bolster the city’s foundering pensions on Wednesday, while urging state lawmakers to change the Illinois constitution, legalize recreational marijuana and approve a Chicago casino.
Just five months before leaving office, Emanuel outlined his plan for dealing with the city’s $28 billion pension problem in a rare speech before the full City Council.
He also used the occasion to boost his own legacy, highlighting how he’s tried to tackle the pension issue “honestly and forthrightly” during his eight years in office.
“The truth is, going back decades, too many elected leaders, too many labor leaders, to many civic leaders, people in positions of responsibility, agreed to a funding and benefits system that was not sustainable. And, therefore, it was irresponsible,” Emanuel told aldermen.
“Some knew it, and others should have known it. Simply put, leaders in the past made commitments without the resources to back them up. And now, inevitably, the bill has come due,” the mayor said.
After decades of underfunding, Chicago’s pensions for police, firefighters, laborers and municipal workers are more than $28 billion short of what they’re required to pay out in retirement benefits. In recent years, pension costs have gobbled up an ever-growing share of city revenue, crowding out money for city services.
For much of his second term in office, Emanuel has lobbied Springfield to ease the pension burden, but it has been an uphill battle. Wednesday’s speech was about framing the conversation around pensions, rather than pressuring aldermen into taking another tough pension vote ahead of the Feb. 26 city elections.
Instead, those tough decisions will fall to one of the crowded field of candidates running to replace Emanuel, who is not running for a third term. It will also fall on state lawmakers who would have to approve some of the major changes he’s suggesting.
‘Nothing progressive’ about automatic raises for retirees
All the options are politically fraught.
A provision in the state constitution says government worker pensions “shall not be diminished or impaired.” That’s made it impossible for the Emanuel administration to reduce the compounding, annual cost-of-living adjustments for pensioners, which it pegs as a main cost driver.
Those so-called COLAs will cost the city more than $1 billion a year over the next four decades, Emanuel said Wednesday. The mayor railed against the compounding, three percent annual raises at a time when inflation has been “basically zero.”
“This is no COLA. This is a pay raise. Now, I didn’t go to Booth or Kellogg business school, but if it looks like a pay raise, performs like a pay raise, and results in a pay raise, it’s a pay raise,” he said. “There’s nothing progressive about three percent compounded raises for retirees, and furloughs for today’s workers.”
When Emanuel and former Democratic Gov. Pat Quinn tried to eliminate that increase through pension reform in 2014, the Illinois Supreme Court called it unconstitutional two years later.
Because all Illinois pensions are governed by state law, changing the so-called “pension protection clause” would be a heavy lift. An amendment to the state constitution would first need approval from three-fifths of the General Assembly, then from voters in 2020. And any move to cut benefits is sure to be met with staunch opposition from the very labor unions politicians lean on for money and resources come election time.
On Wednesday, Chicago Federation of Labor President Bob Reiter quickly took to Twitter to rebut Emanuel’s call to change the state constitution.
“No unions under the umbrella of the Chicago Federation of Labor have ever agreed to amend the Constitution to alter the property rights that retirees have in their pensions,” wrote Reiter, who leads the umbrella group comprising 300 unions and half a million members.
“I think taking away someone’s property right in their pension is a hard stop.”
Meanwhile, using revenue from a Chicago-based casino is an old plan Emanuel had suggested before his second term in office. But it’s fallen short of winning the necessary approval from Springfield lawmakers.
On Wednesday, Emanuel announced he’s working with State Rep. Bob Rita, a Blue Island Democrat, to push a Chicago casino bill for approval in Springfield next month.
Emanuel also suggested legalizing recreational pot, though he said he believes that could come with some “social costs.” Approval to tax and legalize weed would also fall to state lawmakers and the governor.
Incoming Democratic Gov.-elect JB Pritzker supports legalized pot. But he’s been non-committal about the future of a city-run casino, telling WBEZ earlier this year only that he’s “open to new revenue sources like expanding gambling in Illinois.”
The one concrete step Emanuel took Wednesday was to introduce an ordinance into the City Council that would create a legal entity that could borrow money to pay for down pensions in the future. But the mayor’s office has said it will not push to approve the actual $10 billion pension borrowing plan he’s previously called for, saying that would be left to the next mayor.
Revenue from a casino and marijuana would take years to come in, but the potentially risky borrowing plan would offer immediate relief. The mayor took on that criticism, cautioning that any pension fix that exclusively raises taxes and fees will just run people and businesses out of Chicago.
“I know this plan has risk,” Emanuel told the City Council. “The truth is, there is risk in every choice, and there is risk if you do nothing. The question is before all of us - and I don’t mean just here, throughout the whole city - the question is, which calculated risk is worth taking for the benefit gained?”
A pension problem that’s only growing
Chicago’s state-mandated payments to its workers’ retirement funds are set to more than double over the next five years, from just over $1 billion this year to $2.1 billion in 2023. And the next mayor will be tasked with finding solutions palatable to a tax-weary public.
In 2015, the City Council approved a phased-in, $544 million property tax hike to cover police and fire pensions. In 2017, the city council approved a five-year tax increase on homeowners’ water and sewer bills to help pay for pensions. And earlier this year, the city boosted the 911 emergency surcharge to $5 in order to free up more pension money.
Despite the fiscal pain, revenue from those tax and fee hikes still won’t be enough for Chicago to keep up with its pension payments.
That’s because the city’s pension payment schedules are are governed by the state’s pension code. It sets a specific timeline when the city will need to start making annual payments to get the funded ratio to 90%, which pension experts generally consider to be fully funded. For the police and fire funds, the clock starts in 2021 and ends in 2056. The labor and municipal funds will need to hit that ratio by 2059.
“These contributions must be made,” Emanuel said. “There’s no ifs, ands or buts about it. It’s not my opinion. That is the law.”
Chicago’s pension crisis has been decades in the making. Until recently, the city used an arbitrary equation to determine the city of Chicago’s share of the bill each year. But that so-called “multiplier” bore no relationship to the actual cost of paying out pensions, and over the years, the health of Chicago’s pension funds deteriorated.