Special thanks to Taylor Holmes who assisted in gathering information about what each mayoral candidate has said about pensions for a discussion I had on this topic on the In the Milkweeds podcast. You can listen to that episode here.
This post is an update to previous posts I’ve done about Chicago’s four pension systems (police, fire, labor, and municipal employees) and what the 2019 mayoral candidates have said about pensions. Importantly, I’m not scrutinizing any of the candidates pension or revenue proposals. This post is just meant to explain why pensions are an issue in the race and to provide a summary of where all the candidates stand. You can read my older posts here and here.
Why care about pensions? The quick answer is because under current law the city’s annual pension contributions are going to increase from year-to-year, with the biggest jumps projected to occur in budget years 2020 and 2022 (which correspond to payment years 2021 and 2023). So it’ll be up to the newly elected mayor to identify a way to make those increased payments.
For the 2020 budget the next mayor will need to fill an estimated $270 million hole in order to make that year’s pension contributions. To put that figure in context, the city’s 2018 budget was $10 billion, so $270 million isn’t even 3% of that spending. Nevertheless, the new mayor will need to come up with the money either through raising taxes, cutting spending, or a combination of the two. Many of the revenue-generating proposals candidates favor (like a Chicago casino) simply won’t be available for the 2020 budget.
On December 12, 2018, Mayor Rahm Emanuel laid out his roadmap for shoring up the pension systems’ finances and identified potential revenue sources to make future pension payments. He proposed: 1) changing the state’s constitutional pension protection clause and reducing the annual annuity increase; 2) issuing a $10 billion pension obligation bond; and 3) creating new revenue sources through the creation of a Chicago casino and legalizing and taxing recreational marijuana (both of which would require action by the General Assembly).
For all 14 mayoral candidates I wanted to know the following: What’s their overall stance; are they approaching pensions as a benefit or revenue problem? Where do they stand on the items Mayor Emanuel proposed? Are pensions part of their campaign issues? The chart below shows what I found for each candidate (a ? indicates I couldn’t find a specific answer; please email or tweet me if you have a source for items I couldn’t find and I’ll update the chart).
One last note, many candidates mentioned being in favor of creating a new benefit tier for new hires, referring to this as creating a “Tier 3.” A Tier 3 structure for teachers, laborers, and municipal employees was already created in 2017 by Public Act 100-23. While the structure of the Tier 3 benefit is already in place, city council needs to pass an ordinance authorizing it. The Commission on Government Forecasting and Accountability has a nice write-up explaining Tier 3.
Wait, Why Are the Pension Contributions Increasing Again?
Under prior law the city’s contributions were relatively flat, as shown in the chart below (specifically years 2010-2014).
The method for determining the city’s contributions under prior law was problematic, and contributed to a decline in the pension systems’ finances. Importantly, without changes the pension systems were projected to go insolvent in the near future. As a result, the funding laws were changed in 2016 and 2017. The new funding laws are tied to the finances of the pension systems and are designed so that each pension system reaches a 90 percent funded ratio by a specific year. The funded ratio is metric commonly used to capture a pension fund’s fiscal health, and is the ratio of assets to liabilities. Because the city’s contributions are now tied to the pension systems’ funded ratios, the lower they are, the higher the city’s required contributions will be.
The new funding laws have five-year ramp periods, and city officials identified revenue sources for the payments in those years: property tax increases for the police and fire pension contributions; increased 911 charges for the laborers’ pension fund; and a water-sewer usage tax for the municipal employees’ pension fund. Revenue for the increases in budget years 2020 and 2022 have not been identified, nor has one been identified for the city’s future payments. A long-term, recurring revenue source is needed because under the new laws, between budget years 2023 and 2054 the city’s pension contributions are projected to increase from year-to-year by an average of 2%. Actual year-to-year changes will fluctuate and will depend on the changes in the pension systems’ assets and liabilities.
P.S. if anyone wants to help me compile similar information for the aldermanic candidates and other races let me know 🙂