By: Mark Glennon*
If you’re not exasperated by Chicago’s approach to pension “reform,” you haven’t been paying attention.
The absurdity into which it has descended is anything but “reform.” Nothing good will come out of the Illinois Supreme Court’s decision on the reform case it heard this week. In fact, upholding Chicago’s reform law could constitutionally lock in pension funding obligations far beyond what taxpayers would endure. Here’s a recap:
On Tuesday the Illinois Supreme Court heard oral arguments in the appeal on SB1922. That law, which a trial court earlier struck down, would reduce benefits for two of Chicago’s four pensions, the Laborer’s Fund and the Municipal Fund.
That same law, if upheld, will require increased contributions to those pensions, ramping up gradually to what’s misleadingly called an “actuarially required contribution” — the “ARC.”
But the city is already supporting legislation to reduce its annual pension payments. Even with the entire $500 million-plus new property tax designated to go entirely to the police and fire pensions, the city is about $220 million short. So, the city wants Governor Rauner to sign a pending bill to lower scheduled payments to the police and fire pensions and extend the deadline for fixing them.
In short, Chicago is arguing to uphold a law requiring higher contributions to two of its pensions while seeking legislation to lower contributions its contributions to its other two.
On the right is the city’s estimate of scheduled, combined annual payments required from taxpayers for Chicago’s four pensions, assuming the court upholds SB1922 for the Laborers’ and Municipal pensions and the current contribution schedule stays for police and fire pensions. (It comes from Table 15 of the disclosure document filed in June by the city for it general obligation bonds.)
Backloading (or can-kicking, if you prefer) is obvious, especially for a city with no population growth. And that’s just the city’s own rosy projection. Backloading likely will worsen significantly and required contributions will be higher, however, for two reasons. First, Chicago may get its reduction in near term requirements for funding the police and fire pensions, deepening the annual underfunding.
Second, the real contribution required will be whatever-it-takes, hell-or-highwater amounts, starting in five years for the Laborers’ and Municipal Pensions. That is, full ARC payment must start in the year 2020. For police and fire pensions, a sort of modified, backloaded version of that is already in place. (See the Civic Federation’s description of that linked here.)
What that means is that if things don’t go the way the way the actuaries predict and they are forced to change their assumptions, taxpayers must make up for the resulting shortfall. The funds assume they will earn 7.5% – 8.0% on their investments, an assumption that’s widely ridiculed. Many other assumptions on things like how long retirees will live and numbers of new employees may also prove faulty and result in higher liabilities for the city.
Chicago, by the way, uses the same actuarial firm for three of its four pensions that Detroit used before its bankruptcy. After bankruptcy, Detroit’s emergency manager got reports from a new actuary saying the city’s pension liabilities were billions higher than previously thought. According to the New York Times, the firm used before bankruptcy “was sued after Detroit went bankrupt by city workers and residents who accused it of professional negligence. They complained, among other things, that the firm based calculations on the assumption that the city payroll was increasing when in fact Detroit was collapsing and its payroll was shrinking.” It’s easy to find plenty of other news stories on that chapter in Detroit. I will have to let you look at those and decide for yourself if Chicago’s officially reported pension liabilities are realistic. UDATE, 11/21/15: A Forbes article yesterday by a prominent actuary discusses Detroit’s experience with that actuarial firm.
Now, keep in mind that SB 1922, the reform law being decided by the court, won’t reduce benefits or pension costs very much if it’s upheld. The annual savings on taxpayer contributions is already reflected in that schedule above. The law would reduce the unfunded liability by only about $2 billion, or 10% of the city’s total unfunded liability, according to one independent analysis, (The city has not published any scoring of the reform bill to my knowledge, and reporters never ask for it). Whoopee. That would put us back to where we were only about a couple years ago, given the rate at which these funds are deteriorating.
In short, the can is being kicked, big time, and there’s nothing on the table that will end it.
And it will get much uglier if one the city’s own legal positions is accepted.
If the court upholds the reform law, according to the city’s own lawyers, it will be constitutionally prohibited from ever cutting back on the new, higher, whatever-it-takes funding schedule. Pension benefits cannot be cut under the pension protection clause but they can be underfunded. Underfunding has been routine and, in some years –“pension holidays” — contributions were skipped entirely.
But this reform bill contains a particularly strong “funding guaranty.” Funding guaranties attempt to assure that scheduled pension obligations get made. We’ve been writing about how insidious they are for a couple years. They are routinely stuck into pension reform bills. On Tuesday, one justice asked the city’s lawyer what would prevent the legislature from repealing the contribution schedule in the new law. He answered that the new law’s funding guaranty is so strong it would create a constitutionally protected contract right for each pensioner!
In other words, he said the city would be entirely waiving its claim that the city is not obligated to fund its pensions. If that claim is valid, it should have been used as the keystone of real pension reform — just stop funding the old pensions and fund, instead, a new, affordable system. Instead, we may well end up with a ruling that constitutionally forces pension contributions. Such a ruling might well apply to many other pensions.
Mayor Emanuel inherited a backloaded pension time bomb. However, he is making no serious effort to fix it. The “Edgar Ramp” is the term we now use for the can-kicking pension funding schedule for Illinois state pensions signed by former Governor Jim Edgar. It became unaffordable, and it’s rightly blamed as a major cause of our state-level pension crisis.
Regardless of how the court disposes of SB1922, Chicago will face a similarly impossible ramp-up of pension contributions. If Mayor Emanuel completes his term having only extended it, expect it to become known as “Rahm’s Ramp.” If SB1922 is upheld using the city’s own rationale, expect it to become known as “Rahm’s Irrevocable Ramp.” It’s charted on the right.
Mark Glennon is founder of WirePoints. Opinions expressed are his own.