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When the Illinois Supreme Court decisively rejected Mayor Rahm Emanuel's plan to keep two city worker pension systems from going broke, City Hall told nervous credit-rating agencies it would have an alternate fix within weeks.Nearly seven weeks later, Emanuel's...

Emanuel keeps Wall Street waiting on pension overhaul

When the Illinois Supreme Court decisively rejected Mayor Rahm Emanuel's plan to keep two city worker pension systems from going broke, City Hall told nervous credit-rating agencies it would have an alternate fix within weeks.Nearly seven weeks later, Emanuel's...

Emanuel keeps Wall Street waiting on pension overhaul

When the Illinois Supreme Court decisively rejected Mayor Rahm Emanuel's plan to keep two city worker pension systems from going broke, City Hall told nervous credit-rating agencies it would have an alternate fix within weeks.

Nearly seven weeks later, Emanuel's top aides have yet to propose any new ideas, much less file the state legislation that would be needed to make it reality.

Playing the waiting game are Wall Street analysts. Their pronouncements on Chicago's creditworthiness determine how much it costs the city to borrow money, and they've already warned that further downgrades could be coming if there is no solution for the pension funds covering municipal workers and laborers.

Another hit to the credit rating most likely would result in even higher interest rates at a time Emanuel is making plans to borrow up to $600 million in the coming months under a move the City Council Finance Committee will consider Monday.

While paying more to borrow money is a troubling prospect, fixing the pension funds poses its own predicament. It could result in another big tax increase just months after the mayor and aldermen hit homeowners with a record $543 million property tax hike to bridge a shortfall in the police and fire pension systems.

And so Emanuel's brain trust continues to parse the state Supreme Court's opinion, looking for a path that so far has eluded it.

The court placed a "straitjacket around us," Emanuel recently told an audience of debt analysts and investors who ultimately will determine the city's borrowing costs. "And we are back at the table, at least as it relates to labor (and) municipal, working through that issue. And I will consistently work to both ensure people their pensions, but do it in a way that I think is responsible for our taxpayers."

Illinois Supreme Court ruling forces city to find new fix for 2 pension funds Hal Dardick

The Illinois Supreme Court dealt Mayor Rahm Emanuel — and in turn Chicago taxpayers — a big blow on Thursday when it found unconstitutional a law that aimed to shore up two city pension funds by cutting benefits and requiring workers to pay more toward retirement.

A group of unions, current workers...

The Illinois Supreme Court dealt Mayor Rahm Emanuel — and in turn Chicago taxpayers — a big blow on Thursday when it found unconstitutional a law that aimed to shore up two city pension funds by cutting benefits and requiring workers to pay more toward retirement.

A group of unions, current workers...

(Hal Dardick)

But given the high court's rulings on the sanctity of government worker pension benefits, some believe the city has no choice but to simply start paying the $11.2 billion owed to the two funds.

Among them is the Municipal Employees and Benefit Fund of Chicago, which is nearly $10 billion in the hole and at risk of going broke within eight years, according to a recent analysis it commissioned. The smaller Laborers Annuity and Benefit Fund has about $1.2 billion in red ink and is projected to run out of money in 11 years, according to its most recent audit.

Both pension funds backed the proposed benefit cuts the Supreme Court struck down. Now that a different approach is required, the municipal workers are pitching state lawmakers on proposals to shore up the fund by dramatically increasing the amount of taxpayer money going into it.

Under the proposal, the city would be required to come up with at least $509 million more in annual contributions to the funds within the next five years and at least $1.6 billion over the long haul. Where would the money come from? A Chicago casino, which still doesn't exist despite two decades of city efforts. It's the same money machine Emanuel is eyeing for the police and fire pension funds.

Emanuel pension bill now in Rauner's court Hal Dardick and Monique Garcia

A bill that would ease the immediate pain of escalating city pension contributions has been sent to the desk of Gov. Bruce Rauner, but its chances of becoming law remain slim given the continued partisan gridlock in Springfield.

The bill, backed by Mayor Rahm Emanuel, would reduce required city...

A bill that would ease the immediate pain of escalating city pension contributions has been sent to the desk of Gov. Bruce Rauner, but its chances of becoming law remain slim given the continued partisan gridlock in Springfield.

The bill, backed by Mayor Rahm Emanuel, would reduce required city...

(Hal Dardick and Monique Garcia)

Even with a casino, the city would have to cut spending, raise hundreds of millions of more dollars each year or both to make the contributions required under each of the payment schedules under four different versions of the municipal workers' plan. With Chicago's sales tax already the highest among big cities in the nation, the one place the city can turn for new revenue without help from state government is the property tax — a particularly difficult political prospect given that taxpayers already are being hit up for the police and fire pension funds.

The ruling

Emanuel's initial pension fix — approved by the General Assembly and signed by then-Gov. Pat Quinn in 2014 — also would have required additional taxpayer funding, about $473 million more by the fifth year, when the rate of increases would slow significantly. But current city and retired workers would have picked up about a third of the overall cost by contributing more to the funds and getting lower cost-of-living increases on retirement benefits.

A group of unions, current workers and retired employees sued, noting that the 1970 Illinois Constitution states that pension benefits can't be taken away once they're given. In a 5-0 opinion, justices agreed, saying the lower cost-of-living increases diminished the benefits.

The ruling wasn't a surprise, given that justices issued a similar one on a case involving an attempt to cut state pension benefits. But the Emanuel administration had hoped justices would provide a path to an acceptable way to lower the cost to taxpayers of making the two pension systems financially sound.

However, the 18-page opinion included only what at best could be described as hints rather than a road map for solving the problem. Just a single paragraph discussed potential ways to change the pension systems and survive a constitutional challenge.

Even then, it was just a few sentences that referred to broad-brush legal principles, without offering any specifics. And it gave no guarantee that a deal based on those principles would still not run afoul of the state constitution, which guarantees that membership in a government pension "shall be an enforceable contractual relationship, the benefits of which shall not be diminished or impaired." That's the clause that killed off Emanuel's previous plan.

"The Illinois Supreme Court leaves open the possibility of future changes ... but they've provided no firm direction as to how the legislature or the city could accomplish that," said Laurence Msall, an attorney and president of the nonpartisan Civic Federation budget watchdog group.

The broad-brush principles the justices did mention allow contracts to be reopened only if the side seeking concessions in return provides something of value, or "consideration," which is a term that is open to considerable interpretation.

And the city could not just make those changes by fiat. It would have to either pursue potentially lengthy and complex labor negotiations with each of the 31 unions representing city workers in the two funds or give each of the workers in the funds an option to keep what they have or take a new deal.

Time is money

All of that takes time, particularly if what emerges results in further legal challenges. And time isn't on the city's side, given Emanuel's plans to continue to borrow money to pay for major infrastructure projects and legal settlements.

Waiting too long is also viewed as poor fiscal policy. The longer the city waits to start paying down the pension debt, the bigger it grows. And if further credit downgrades come as a result of inaction, the city will pay higher interest rates to borrow money.

Asked how long it will be before the city comes up with a proposal, Emanuel and his aides say only that they continue to work on the issue, much as Emanuel told the debt analysts and investors who last week held the annual meeting of the National Federation of Municipal Analysts in Chicago. Corporation Counsel Stephen Patton, the city's top attorney, and Budget Director Alexandra Holt declined requests to be interviewed on the topic.

There are other pressures that could harm the city's creditworthiness. A bill to lengthen the amount of time for the city to restore financial soundness to the police and fire pension funds sits on the desk of Gov. Bruce Rauner amid a partisan stalemate in Springfield.

If Rauner does not sign it, the record property tax increase approved last year by the City Council will not be enough to cover the tab. It would leave the city with a hole of more than $220 million in this year's budget, and a total of nearly $1 billion over the next four years.

On top of that, Chicago Public Schools is scraping to get by and may have exhausted its ability to borrow money. Although it's a separate government agency, its financial woes are taken into consideration when analysts evaluate city debt.

"There's just a calendar of likely bad news releases that's going to hit the city and potentially undermine its ratings and the value of its bonds over the next year or two," said Matt Fabian, a partner at Concord, Mass.-based Municipal Market Analytics.

Court rulings and lack of help from Springfield are gradually "extinguishing" the city's options to save money and pay its debts, making it "more likely that the city will have to raise taxes again — maybe not property taxes, but some kind of tax increase," Fabian said. "That is in general where the bond market sees Chicago going, that it's moving slowly toward another large tax increase."

The options

Emanuel has said the city is mulling many options, including the consideration model. That's an approach Illinois Senate President John Cullerton, D-Chicago, who is likely to carry the city water on any deal, has long said is the most likely option to save taxpayers some money and stand up to a constitutional challenge.

For state employees, Cullerton has proposed giving employees an option: collect the current 3 percent compounded cost-of-living benefit increases upon retirement, but give up future raises in determining pension benefits; or have future raises factored in but accept lesser cost-of-living increases.

Legal opinions on whether that would withstand a constitutional challenge differ. Ann Lousin, a John Marshall Law School professor who helped draft the state constitution, said the city could offer those kind of choices and be square with the constitution.

"If they are real choices, and people take them — what I would call a knowing and intelligent choice — as to that person, they can do it," Lousin said.

But Ralph Martire, an attorney who is executive director of the Center for Tax and Budget Accountability, said the Cullerton model would not pass muster: raises previously have been calculated into the pension benefit formula, so removing them from the equation would be an unconstitutional diminishment of benefits. "It's a choice between a lesser benefit and a lesser benefit," he said.

"It's a challenge to try to construe how you can put together a proposal that both saves money for the public-sector employer over both the short and long term and represents valid consideration," Martire said. "So, it's a challenge. I'm not saying it's impossible. I can't think of a way."

The Cullerton model, which was considered in the legislature a few years ago for the state, would save less money because it affects only current employees, not those already retired.

Some City Hall types are wondering if part of Emanuel's previous plan would work, noting that while the Supreme Court said no to cutting cost-of-living increases, it did not rule on whether requiring employees to pay more passed legal muster. Cullerton, the Senate president, believes that justices would consider that cutting benefits, spokesman John Patterson said.

Clint Krislov, an attorney who represented retired workers in the case that led to the Supreme Court ruling striking down Chicago's plan, suggested that there might be a constitutional way for the city to save money and ensure both current and retired city workers get the benefits they are owed.

"You could put together a new package," Krislov said, provided it included valid consideration. "Here's the package. . . . and those of you who wish to accept it, switch, you can take it. They can do that."

But Krislov, like several major union representatives contacted by the city, said he has not heard from the city since the Supreme Court ruling.

"If the city wants to explore resolving this, they have my phone number," said Krislov, who also is suing the city for its move to stop subsidizing retiree health costs. "Generally, I know it's them calling, when the phone don't ring."

[email protected]

[email protected]

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