By: Mark Glennon*
“Guaranty provisions” have been highly controversial since municipal unions first began having them inserted into pension reform legislation in 2012. The new Chicago pension bill contains a real doozy that’s been mostly overlooked.
As you probably know, the new state law requires Chicago to make payments into two of its pensions, starting at $50 million next year and increasing each year to $250 million in year five. Thereafter, the city must make payments sufficient to bring the pensions’ assets to 90% of actuarial liabilities by 2055.
If the city doesn’t pay up, the pensions can get a court order forcing the payment, subject only to a vaguely worded exception about public health and safety. But here’s the kicker: If the city doesn’t pay, the State of Illinois is required to subtract the missed payment amount from Chicago’s share of sales taxes that the state collects and remits to the city (subject to a three-year phase-in) and give it directly to the pension. That’s a big pot of money critical to Chicago — over $500 million per year.
The new law makes that set-off automatic — no court order needed, no exceptions. Even that vague exception for public health and safety does not apply. So, there’s basically a hell-or-high-water mandate to make the payments, which will be an astronomical $250 million in five years, and maybe more thereafter.
Because this is a state statute, amending it would require approval of each of the House, Senate and governor.
The public unions were particularly clever to get this. Even bankruptcy might not undue it. (If Springfield were ever to authorize Illinois cities to file bankruptcy). That’s because bankruptcy generally doesn’t modify third party arrangements like this. As with the state pension law passed last year, the union strategy has been to accept some reduction in benefits but lock down everything else in a way that cannot be undone by more serious reformers who might come later to Springfield. It’s working. As we said in that 2012 article, guaranties like this amount to carving up the government’s body parts between public pensions and bondholders.
One interesting question is the effect a set-off by Illinois against Chicago might have on Chicago’s bondholders. The new law expressly says, in connection with a court order the pensions could get forcing the city to pay up, that bond obligations are senior and get paid first. But that priority is not made clear respecting the set-off by the state. Some bonds are expressly secured by sales tax receipts, and that security interest is presumably safe. But if those secured bonds are paid, leaving some sales tax revenue unencumbered, that free cash flow would be in doubt. General obligation bondholders no doubt are taking a good look at this.
Just more “theater of the absurd,” as State Representative David McSweeney recently described Springfield.
Full text of the new law is linked here.
*Mark Glennon is founder of WirePoints and a business consultant