A tax policy expert says he fundamentally disagrees with Mayor Rahm Emanuel that Illinois lawmakers must amend the state’s constitution to address the city’s looming pension crisis.
While it may be the only way to eliminate automatic annual 3 percent increases in what pension payouts, Ralph Martire of the Center for Tax and Budget Accountability says the plan is misguided.
“Why we disagree: Why take away the constitutional protection for workers when legislatively, you can create a Tier II, Tier III, Tier IV that has a different cost of living adjustment, COLA, for workers going forward?” he told WBEZ’s Morning Shift.
The constitutional amendment is the first of four "sequential steps" Emanuel laid out in a speech to the City Council Wednesday to address the additional $1.1 billion a year Chicago will need to pay into its pension system by 2023.
The second step is pension obligation bonds. By issuing POBs, the city could realize significant savings as long as the effective interest rate on those bonds is lower than the interest rate on the city’s pension liabilities, which the mayor says is currently between 7 and 7.5 percent.
Mayor Emanuel likened that move to “refinancing your mortgage at a lower rate.” Martire, who supports the idea, said it’s like trading a more expensive form of debt — the debt owed on past-due pension payments — for a less expensive form of debt — the debt owed to bondholders. Issuing POBs does not increase the city’s overall debt burden.
The mayor also called for legalizing recreational marijuana and establishing a Chicago casino as ways to raise revenue.
So, are the mayor’s ideas the best solutions? Morning Shift explores the city’s pension woes and some possible fixes.
Tony Sarabia: We’re about to reach a pension ramp, meaning the city is on the hook for about $1 billion towards pensions a year right now, but by 2023, that will ramp up to more than $2 billion dollars. How did we get here?
Ralph Martire: Well, historically, the state had a funding formula for its pension system that ignored the actuarially required contribution, and what that is, in lay terms, is that actuaries look out 30 years forward and say that based on your current number of employees and actuarial tables for longevity, blah, blah, blah, blah, blah, here’s what you ought be putting in today to have sufficient assets to pay the benefits when these people retire over the course of the next 30 years. That was never funded. That would be a problem. And it created a significant mismatch between the amount of money going into the system and what the system actually needed to pay for future benefits.
Sarabia: What were some of those reasons why we didn’t do this?
Martire: The main reason is Illinois has historically been a relatively low-tax state. That’s number one. And elected officials don’t like to explain to taxpayers that you have to put some money in up front. And they don’t like us to raise taxes to cover long-term obligations. In fact, because pensions are long-term obligations, they are really hard to deal with appropriately in a political process if you think about it. A political process is very concerned with this budget year, this election cycle. Pension problems arise way down the road when you are out of office. That’s a good time for the problem to arise. So under funding it today doesn’t necessarily create political consequences for the people making the decisions to underfund it.
Sarabia: So, the current mayor is leaving office, but when it comes to this issue, what has he done to address it since he’s been in office?
Martire: Well, actually, he’s been very fiscally responsible when it comes to dealing with this. He did pass that very significant property tax increase just a couple of years ago, and it was needed and it was the right thing to do. I mean, there are only so many revenue tools in the kit available to municipalities, and sadly, you know, property tax is the key one available. And I say sadly because in Illinois while we’re overall a pretty moderate-tax-burden state if you compare total tax burden in Illinois to all other states as a percentage of income we’re about 27th, below the halfway point. That said, if you isolate the property tax, we’re very high. And the reason for that is that the state has underfunded K-12 education for generations.
Sarabia: One of the things that the mayor does want to do...he wants to do away with the automatic annual 3 percent increase in how much pensioners receive. Those are known as COLAs, or cost of living adjustments. And, of course, doing that would require this amendment to the constitution. Do you agree with the mayor that this is a necessary step?
Martire: Not only don’t we agree with the mayor that this is a necessary step, it’s not constitutional to do it. And, so if you get your constitutional amendment that says alright, benefits are no longer guaranteed, that only works going forward. It doesn’t impact any employee who is in the system prior to the change to your constitution.
Sarabia: Didn’t the Supreme Court when they blocked the state [in 2015], was it for ‘going forward’ or what was the state trying to do, because this seems like a big roadblock…
Martire: You cannot reduce a benefit that was a pension benefit that was promised to an employee in the state of Illinois that’s a public sector worker as of the date of their employment. That is their benefit for their tenure. Period. End of story. Ironclad. If you change the constitution, that only changes the protection for the employees after you change the constitution. So all of the accumulated costs associated with this 3 percent compounding COLA that are accruing now and will be accruing for workers that are still getting it, can’t be taken away even if you change the constitution. So, why we disagree: Why take away the constitutional protection for workers when legislatively, you can create a Tier II, Tier III, Tier IV that has a different cost of living adjustment, COLA, for workers going forward? You accomplish the same thing in much less time, because passing a piece of legislation through Springfield is a much quicker process than getting a constitutional amendment.
Sarabia: The mayor will also propose legalizing recreational marijuana, allowing a Chicago casino. What do you make of those proposals?
Martire: Well, it just shows you how limited the revenue options are to a municipality. It’s far more limited than say what the state of Illinois has. And so, Mayor Emanuel already went after the property tax relatively significantly, raised a lot of money to help cover the growth in the pension payment under the ramp in the last four years, and now he’s frankly just looking for revenue alternatives to cover the growth in that ramp over the next four years, and you know, these are kind of speculative, right? First we have to pass the law, and then we have to establish, and there are some issues with them as revenue sources, so you know, casino money, just number one, as a revenue source, over time, tends not to grow with the economy, so it doesn’t grow with inflation over time. Over time it creates a little bit of a structural imbalance that will have to be back-filled with a new revenue source.
Sarabia: And it takes a while for that revenue to be realized. You’re talking about creating the casino facility, maybe from the ground up, all of that stuff, and then realizing the revenue…
Martire: Yeah, so there is a time delay. And it certainly is a regressive way to tax. I mean, it’s not the Pritzker family going out and betting the monthly rent on lucky number 7 at the casino. It tends to be low-to-middle income families, so it’s a relatively regressive way to raise money. And you know, if you look at it overall, it’s an inefficient way to raise tax revenue because for every $8 or $9 gambled, you get $1 of revenue, so a direct tax would be a lower cost on the taxpayer overall. The problem is the city doesn’t have many direct taxes available to go after, and the small fees they charge, the plastic bag fee, the this fee, the that fee, people feel nickel and dimed, so even if it’s not a significant cost, they generate a lot of animus among the voting public, which makes the environment more difficult to raise revenue.
This interview has been edited for brevity and clarity. Click play to hear the full conversation.
GUEST: Ralph Martire, executive director of the Center for Tax and Budget Accountability
LEARN MORE: Chicago Mayor Halted Pension Crisis, But Leaves Big Bills Ahead (Bloomberg 10/18/18)