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By: Mark Glennon*


It only gets worse. Last week’s Illinois Supreme Court decision was no surprise, but the real news was about reaction to it, or, more specifically, non-reaction. Chicago remains cracked up on denial. The numbers are insurmountable without radical reforms, almost certainly including bankruptcy.


The decision itself:

The primary holding was widely expected. The court had earlier made clear that cuts in pension benefits are unconstitutional. The invalidated reform law would have cut benefits paid by two of the city’s four pensions. Pursing a such a futile case was just another chapter in the playbook of delay and denial.


Importantly, however, the court went further and ruled that the city has direct liability to pensioners on promised benefits if the pensions ever run dry. Some of us had hoped the court would not so rule. The question now, however, is how far the court might take that ruling in the future.


Presumably, municipalities are now directly liable for their police and firefighter pensions promises, and most of those 650 funds are horribly underwater. But what about, say, IMRF?  IMRF is comparatively well-funded now and is sort of a hybrid, being statewide but covering local municipal officials. What, if any, entity is liable for it? Municipal taxpayers are now on the hook for municipal employees’ pensions but nobody is on the hook for IMRF pensions of municipal employees? The court offered no rationale for distinguishing that clear unfairness.


Or suppose Chicago Public School district goes bankrupt or the state dissolves it and reconstitutes it, is the city liable for its pensions? I know that seems crazy, since CPS, not the city, is the employer. However, you can’t put anything past this court. (See our earlier piece on how irrational this court has been on pensions and other matters.) How about the Metropolitan Water and Reclamation District and Cook County pensions? They, too, have a severe pension crisis. One would hope that only the sponsoring entity is liable, but the court provided no rationale that would indicate that makes any difference. The legislature initially expressly laid out which entities are liable and which are not, but the court now says those statutes don’t matter because the subsequent pension protection clause in the constitution trumps them. That’s about all they said, so we don’t really know what the rules are for who is liable.


The numbers:

The city should be paying $1.8 billion per year to properly fund its four pensions, according to the city’s actuaries and accountants. (That $1.8 billion is the “Annual Pension Cost,” as shown in Chicago’s financials.) Yet the city is budgeted this year to fund just $978 million, and that number will now be reduced because higher contribution schedules were invalidated along with the city reform law.


So, the city is grossly underfunding the pensions and growing their unfunded liabilities even according to its own shady accounting. That $1.8 billion the city is supposed to be funding is built on all the usual phony assumptions, like returns of over 7%, which no reputable financial economist of any political stripe supports. True pension liabilities are two to three times the officially reported numbers, they usually say.


There’s no way Chicago can raise taxes sufficiently to properly fund its pensions.


The reaction:

No choice now except drastic action, right? Oh, please.


Fitch, the rating agency, downgraded the city’s bonds but included this sappy comment:


City Strategy Anticipated: The city expects to present a strategy to address the increased burden resulting from the ruling in the next several weeks. Given the lack of flexibility to alter the liability, Fitch believes the plan must rely on meaningful use of revenue and expenditure controls to meet much higher annual payments.


Moody’s, similarly, said Chicago must come up with “a clear plan” to stabilize the pensions promptly.


No, Fitch and Moody’s, the city does not intend to present such a strategy and there will be no such plan.  To repeat the challenge that nobody will take up: What possible combination of tax increases and spending cuts will put the city and its overlapping jurisdictions on a sustainable path absent either a constitutional amendment deleting the pension clause or bankruptcy? There is none. And the problem with a constitutional amendment, by the way, is that pensioners would fairly ask why only they should get cut and not other creditors. That’s what bankruptcy is for — to fairly allocate losses.


Then Mayor Emanuel weighed in claiming the ruling “offers two paths going forward”:


One, contractually negotiate with labor. And I will sit at the table, and we’ll do it in a way that’s fair to taxpayers and fair to people that work for the city. And then the other approach is the choice method through legislation that [Senate President John] Cullerton’s talked about. And both of those, I think, are the right roads to take.


Um, Rahm, labor will sit at that table and say what they’ve always said — “no” — and this time they will have a final court ruling on their side.


As for that perpetually recirculated idea of a choice method — the consideration approach — can somebody stop and think for a minute about how irrational it is to think that will accomplish much? The press is forever bringing it up, too. It’s flawed on its face, by definition, and the city itself explained why in court:


To give participants (or their legal representatives) an incentive to agree, the value of such consideration would need to be similar to the value of the benefits given up. But this would involve trading one obligation for another and by definition would not solve the problem that neither the fund nor the governmental entity has enough money to pay the benefits promised….


There is some potential saving respecting those still working, because pension cuts might be offered in exchange for future pay raises or continued employment, although that would probably be litigated for a couple years and the courts (ruled by pensioners) wouldn’t like it. Those already retired would have no reason to give up anything.


In other words, pensioners won’t choose an option making themselves worse off.


Too bad we can’t assume the rest of Chicago is that rational.


*Mark Glennon is founder of WirePoints. Opinions expressed are his own.








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Dave May

“by” 2.7%

Dave May

If the City of Chicago raised their property tax rate to 2.7%, that would generate enough revenue to pay for the pensions. The composite tax for Chicago would then be about 8.5%. That is lower than the average Cook County north suburbs rate of over 10% and south suburbs rate of over 13%.

Franklin Maxwell

Rahm doesn’t have time to work on this pesky problem. He has more important things to do– like today his announcement that he is going to chase North Carolina business who might not like the new LGBT legislation in NC. He actually talked to one guy today he said. I’m sure there are a lot of NC businesses who think LGBT issue are more important than the impending Illinois implosion. Talk about hiding from reality!

Tough Love

An upside for NJ’s Taxpayers may be that IT’S Unions/workers/retirees will get a preview (via the shake-out in Chicago/Illinois) of the devastating result to their retirement security when Unions dig their heels in and won’t offer material reductions to their clearly unaffordable pension & benefit promises.

J.A. Herzrent
The opinion states: “¶ 43 The City’s contention, if adopted by this court, would be inconsistent with the plain meaning of the pension protection clause, would undermine our holding in Heaton, and would lead to an absurd and unjust result. Rather, as we have explained, the Illinois Constitution mandates that members of the Funds have “a legally enforceable right to receive the benefits they have been promised”—not merely to receive whatever happens to remain in the Funds. Heaton, 2015 IL 118585, ¶ 46; Lindberg, 60 Ill. 2d at 271 (holding that the pension protection clause was a guarantee that members of the pension system would receive pension… Read more »