Rating agency: Options abound for city pension reform
BY FRAN SPIELMAN City Hall Reporter June 4, 2014 12:15PM
Mayor Rahm Emanuel is hailing a U.S. Supreme Court decision Monday upholding the conviction of a one-time Virginia cop who lied on a federal form that he was buying a gun for himself — when he actually made the purchase for his uncle. | Brian Jackson/Sun-
Updated: July 6, 2014 9:48AM
Even if Gov. Pat Quinn vetoes a Chicago pension reform bill, there’s nothing stopping Mayor Rahm Emanuel from raising the city’s contribution to two pension funds, either by cutting spending or raising property taxes, telephone fees or some other tax, according to a Wall Street ratings agency.
Moody’s Investors Service has already dropped Chicago’s bond rating by four notches in eight months — to just three levels above junk status.
Yet another ratings review could be triggered by a Quinn veto of a Chicago pension reform bill or a successful legal challenge of it that would increase employee contributions by 29 percent and reduce employee benefits to save the Municipal and Laborers pension funds.
But in a meeting with the Chicago Sun-Times this week, three Moody’s analysts suggested another possible path: Even if Quinn vetoes the bill, Emanuel could proceed as if the legislation had been signed into law.
“The city only needs state approval to restructure benefits and achieve savings on the benefits site . . . It does not need state approval to fund those plans above the amount they’re already funding them,” said Matthew Butler, assistant vice-president/analyst for Moody’s U.S. Public Finance Group.
“As a home-rule entity, the city could raise taxes or…cut expenditures and pay more to those plans or pay amounts that are in line with actuarial standards, as opposed to just paying the statutory requirement.”
Emanuel has maintained that there will be no new revenue without pension reform.
“That’s been the city’s position. But that doesn’t mean they couldn’t pay more,” Butler said.
And even if the unions refused to accept higher city contributions, senior analyst Rachel Cortez said there’s nothing stopping Emanuel from “increasing property tax revenues to build up reserves that the city held and dedicated simply for pensions.”
The Moody’s team was asked whether the 56 percent increase in Chicago’s telephone tax authorized by the Illinois General Assembly could allow Emanuel to reduce the $250 million property tax increase — or put it off until after Feb. 24 election.
“If they raised the tax and it generated more revenue than was needed to actually fund what they’ve earmarked it to fund and they diverted some of that revenue to the pension system, that would be [fine]. It would essentially be more money going to the pension system,” Butler said.
Emanuel has said repeatedly he’s open to other revenue ideas. But Emanuel said the revenue source has to be "reliable enough" to pass muster with Moody’s.
Cortez, Butler and analyst Thomas Aaron took exception to that statement.
“However the city chooses to fund its pensions, that’s up to them,” Cortez said
“What our analysis does incorporate is the fact that they do have a lot of revenue-raising options that other municipalities don’t. A non-home rule municipality in a tax capped county in Illinois cannot raise property taxes beyond a certain point. Chicago can. So, all of the questions about, `What could the mayor and the City Council do,’ it’s kind of, whatever they want to do.”
The mayor's office had no immediate comment on the surprise suggestion by Moody's.
Emanuel's plan to raise property taxes by $250 million and a looming, $600 million payment to stabilize police and fire pension funds has aldermen looking under every rock for alternative sources of revenue.
The Moody’s team had a sobering warning about the $600 million payment mandated by state law next year.
Most of that money will have to come from the city — either in the form of increased taxes or draconian cuts in city services — because police officers and firefighters don’t get the compounded cost-of-living adjustments targeted to produce so much of the savings for the Municipal Employees and Laborers pension funds.
“The potential for achieving savings through restructuring of police and fire pension benefits is a lot less….On the Municipal and Laborer side, the [cost-of-living] adjustments are compounded. On the police and fire side, they are not,” Butler said.
“The city could raise revenue. The city could cut costs. The city could increase employee contributions. The city could implement a combination of all three of those things.”