Illinois: Municipal Employees’ pension fund solution in sight for Chicago

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At the beginning of August, Chicago Mayor Rahm Emanuel announced that he and the city’s union partners had reached an agreement in principle to stabilize the Municipal Employees’ Annuity and Benefit Fund (MEABF). Their solution, said the Mayor, “protect[s] Chicago taxpayers from solely bearing the full burden of growing pension costs in the future.” 

Without action, the MEABF will be insolvent by 2025. But revenue from the stabilization plan, along with funding from the existing MEABF, and the proportionate share from enterprise funds, will pay Chicago’s pension contributions beginning in 2017, so the MEABF should be 90 percent funded ratio by 2057. 

The stabilization plan to put the MEABF on a road to solvency features a $0.59 per 1,000 gallons tax on the water-sewer usage of Chicago’s businesses and residents that will appear on their unified utility bills starting in 2017. The tax is to be phased in over five years, ending with a tax rate of $2.51 per 1,000 gallons of water and sewer usage in 2020. The average household, which uses approximately 7,500 gallons of water a month, will see an increase of approximately $4.43 per month in 2017.

As for contributions to the MEABF, the plan increases them by three percent for new hires, and lowers the age of eligibility for full benefits by two years, from 67 to 65, for any new employee hired on or after January 1, 2017. Additionally, for workers hired after January 1, 2011, the plan provides the opportunity to accept a lower eligibility age of 65 for full benefits in exchange for increasing their payroll contributions by three percent. 

The President of the Chicago Federation of Labor declared his support of the plan, as follows:

The Labor Movement is committed to working with the city to develop equitable solutions to fix ongoing fiscal problems… Many of our affiliated unions believe that this plan is the path forward to a secure pension system for city workers and support its implementation. While any plan that introduces a new revenue source is going to be controversial, this is a positive step forward in addressing the retirement security for the workers in the MEABF pension fund. In fact, what everyone agrees on is the pension system is at a critical level and it needs to be corrected quickly. Everyone also agrees that city workers have faithfully paid their portion of the pension and they should not be vilified for receiving the pensions that will be their only source of retirement income.

Chicago’s City Council needs to approve the plan before it can take effect. 

The Chicago Tribune revealed that some City Council members criticized Mayor Emanuel for creating a regressive tax that disproportionately burdens low-income Chicagoans, and for failing to consider other revenue-generating ideas before proceeding with the water and sewer tax increase. These included the following:
  • A tax on financial trading: Mayor Emanuel rejected this on the grounds that it would require Illinois Governor Bruce Rauner’s approval, which is unlikely;
  • A graduated income tax: Mayor Emanuel disapproved because he did not want to rely on state politicians, who would be unlikely to favor a tax change, especially with rating agencies threatening further credit downgrades;
  • Another property tax hike: Mayor Emanuel refused to consider this because last year’s record tax hike, to shore up the police and fire pension fund, has not yet been phased all the way in;
  • A commuter tax on suburbanites: The Mayor again did not want to seek state approval;
  • A storm water stress tax on big businesses: Mayor Emanuel opined that this would not generate enough money to solve the problem;
  • A sales tax increase: Said the Mayor: “We have the highest sales tax in the United States of America…I don’t think raising the sales tax higher than it is is the right way.”
Mayor Emanuel also discarded suggestions to reduce basic services, like garbage collection, tree trimming and graffiti abatement efforts, because Chicago is playing catch-up in these areas as it is.

Once completely phased in, the new water and sewer tax is expected to produce $239 million a year to help reduce the $18.6 billion the city owes MEABF, which represents nearly all city workers except police officers, firefighters, and employees who do manual labor.

Even so, the Tribune pointed out, Chicago still faces very difficult challenges. These include the repeated lowering of Chicago’s credit rating, and the above-mentioned property tax increase seeking to raise property taxes by $250 million next year to help pay for teacher pensions. In addition, all three ratings agencies have given the Chicago Public School District’s bonds junk status.

Mayor Emanuel is optimistic that the Council will vote in his favor on the water and sewer tax increase: "The lion's share of the aldermen did not create the problem, but the lion's share of the aldermen in there have been part of the solution. I am confident they will take the necessary steps.”

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