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Rahm’s pension reform: Freeze retiree pay hikes, up retirement age

 Mayor Rahm Emanuel testifies during House Committee Hearing Personnel Pensions Springfield 2012. (AP Photo/Seth Perlman)

Mayor Rahm Emanuel testifies during the House Committee Hearing on Personnel and Pensions in Springfield in 2012. (AP Photo/Seth Perlman)

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Updated: June 11, 2012 9:01AM

SPRINGFIELD — Drawing a huge union outcry, Mayor Rahm Emanuel Tuesday proposed freezing pension increases for retirees, raising the retirement age and hiking employees’ retirement contributions. a move that he said would keep the city’s underfunded pension systems solvent and avert a property-tax hike of as much as 150 percent.

“The moment of truth has arrived,” Emanuel told the Illinois House as he outlined the bitter pill that union leaders have long anticipated.

Making his first trip to the statehouse as mayor, Emanuel made his own pitch for pension reform, lending a powerful voice to pension scale-backs sought at the state level by Gov. Pat Quinn and top lawmakers before the General Assembly is set to end its spring session by month’s end.

But the mayor’s push threatened to set back his tenuous relationship with labor unions, whose leaders criticized him Tuesday for breaking his word by failing to brief them about his plan ahead of time and engaging in scare tactics meant to alarm city workers and taxpayers.

In starkly laying out his plan to solve the city’s $20 billion pension crisis, Emanuel told the Illinois House Personnel and Pension Committee that city property taxes could soar by 150 percent and that class sizes at Chicago’s schools would jump to 55 students, on average, unless they pass his pension reforms.

“Our taxpayers can’t afford to choose between pensions and police officers, pensions or paved streets or pensions and public health,” he told lawmakers. “Without pension reform, we’ll be forced to mortgage our children’s future to pay for our past.”

The changes that the mayor outlined to reduce the city’s unfunded pension liability by a projected 40 percent mirror the reforms proposed by Gov. Pat Quinn to solve the state’s pension crisis. But Emanuel’s “roadmap to retirement security” go even further:

◆ A five-year increase in the retirement age — raising it to 67 for most civilian workers and to 60 for police and fire department workers. The plan also doesn’t say whether the retirement age would be raised for current employees or just new hires, or some combination.

◆ A suspension of annual cost-of-living increases in pension benefits for current retirees “to stop the bleeding” — a “pause,” he called it, that would remain in place for 10 years. Emanuel noted that a city employee who retired in 1995 with an annual pension of $60,000 now collects $100,000 a year, thanks to those automatic increases. Over the past 10 years, those benefits have grown at a rate “30 percent faster than inflation,” the mayor said.

◆ A 1-percent yearly increase in contributions from existing employees for five years. That would bring the average contribution level a city employee has withheld for his or her pension to 14 percent, city Chief Financial Officer Lois Scott said.

◆ Offering newly hired city employees a “choice” between a defined benefits plan and the 401(k) plans favored by private industry. Union leaders have long opposed a two-tier approach on grounds that it would create a caste system among rank-and-file members.

◆ No additional contribution from Chicago taxpayers until pension reforms are enacted.

Plenty of details were lacking in Emanuel’s plan, including how much the changes would specifically save the city’s six pension systems or how, for example, he would implement a two-tiered pension approach involving 401(k)s.

Emanuel’s proposed changes will likely be incorporated into legislation that could be introduced before the end of the month when lawmakers are scheduled to adjourn their spring session.

Despite that fuzziness, the pension framework Emanuel presented drew joint praise from House Speaker Michael Madigan (D-Chicago) and House Minority Leader Tom Cross (R-Oswego).

“When you’re talking about the concept of pension reform, I like his concept,” Cross said, singling out Emanuel’s bid to halt annual retiree cost-of-living increases for the next decade.

“That’s the real pressure point for pensions. It’s what happens in Illinois. If you’re in retirement for 20 to 25 years, you’ll double your pension because of the compounding nature of it,” Cross said. “You can’t sustain it.”

Madigan told reporters that Emanuel’s appearance in Springfield and his plan were “helpful on pension reform across the board.

“I think he delivered his message that the city pension systems need to be reviewed,” the speaker said. “They need to be examined. They’re not financially sustainable as they’re currently constituted. It’s very similar to what we’re doing here at the state level with the state pension systems.”

But labor leaders reacted angrily to the mayor’s proposals and to the secrecy that preceded the announcement.

By far the harshest reaction came from Henry Bayer, executive director of AFSCME Council 31. In a prepared statement, Bayer accused Emanuel of painting a “distorted picture” that omitted important facts.

City employees earn “modest pensions” — just $31,000 for the average member of the Municipal Employees Pension and Benefits Fund — and are not eligible for Social Security benefits. They have also “contributed faithfully” toward those pensions at a rate of eight percent of every paycheck.

“Mayor Emanuel is wrong to propose that city employees and retirees should now be forced to bear the lion’s share of the burden for fixing a system damaged by shortsighted politicians and reckless Wall Street speculators,” Bayer said.

Chicago Federation of Labor President Jorge Ramirez, who has forged a surprisingly strong bond with Emanuel, felt somewhat betrayed by the way the mayor handled the pension announcement.

“We’re not happy about it. He extended his arm across the table and said, ‘I want to talk to you guys before I make any changes.’ That hasn’t happened yet,” Ramirez said.

Fraternal Order of Police President Mike Shields noted Chicago police officers have only a 1.5 percent annual cost-of-living increase when they retire. Shields accused the mayor of “trying to scare” city employees and taxpayers with “doom-and-gloom” scenarios that pit the two groups against each other.

“He’s failing to tell the property taxpayer that other sources of revenue can be used outside of property taxes to pay pension costs,” Shields said. “We’ve been asking aldermen to look into applying some of the money from speed cameras. There’s legislation to use casino money to pay into pension funds. There’s also the sale of Midway Airport, [which could be revived and] deliver 49 percent of the pension fund.”

Chicago aldermen, whose lucrative pensions have drawn unflattering attention recently, reacted coolly to the mayor’s proposals.

“I do like the [401-k] idea in regards to the new hires. I’m not so pleased with the [increased] age limit. I’m not so pleased with freezing our COLA. But if that’s what it takes in order for us to become whole, then we’ll all have to swallow the bitter pill,” said Budget Committee Chairman Carrie Austin (34th).

As for the five percent increase in employee contributions, Austin said, “Maybe I can pay more into it. Maybe somebody else couldn’t. For those employees who are already scrimping, I don’t want to impose something like that upon them.”

Austin acknowledged that setting up a two-tiered pension system for new and old employees has the potential to divide the city workforce. But, she said, “It also has the potential of being a disaster if we don’t do something ... . If the fund isn’t strengthened, what’s gonna happen? It’s gonna crash. Then, we won’t have a darned thing.”

Ald. Tim Cullerton (38th) is a former deputy building commissioner and a 42-year veteran of the International Brotherhood of Electrical Workers (IBEW) Local 134. He noted that his great-grandfather was a “charter member” of IBEW in 1900.

Cullerton said the mayor’s proposal for a 10-year freeze on cost-of-living increases “might work,” but only for retirees at “certain income” levels.

“It might not work for people who ... are just scraping to get by. But people who have comfortable pensions and certainly people who have multiple pensions should pay some type of a windfall,” said the 63-year-old Cullerton, who is already collecting a city pension after 33 years with the Department of Buildings.

As for the five percent increase in employee contributions, Cullerton said, “It would have to be proven that it’s necessary to save the system. If it’s necessary ... so that you’ll have a pension when you retire, most reasonable people would have to begrudgingly pay it.”

Laurence Msall, president of the Civic Federation, applauded the mayor for going further than Quinn did to help solve the city’s pension crisis by suspending the annual cost-of-living increase for retirees.

“Actuaries have indicted that the 3 percent increase — not indexed to inflation, but compounding automatically — is responsible for almost one-third of the unfunded cost of these benefit programs,” Msall said. “At a time when city employees are being asked to do more with less and taxpayers are being asked to maintain tax payments while their housing values decline, asking retirees to forego an automatic increase is a reasonable and fair approach.”

Msall said he recognized that the retiree changes and the increase in employee contributions are likely to go over like a lead balloon with union leaders.

But he said, “The issue for the employees is: Would they rather have a lower benefit going forward that the city can afford to fund that’s likely to be there, or would they rather maintain the existing system, which is grossly underfunded and is poised to run out of money within 10 to 20 years? Face reality. This isn’t politics. This is math. It’s a financial crisis that threatens the financial solvency of the city of Chicago.”

While the mayor’s plan was regarded by union leaders as direct assault, Emanuel repeatedly insisted that wasn’t his intent and voiced optimism that lawmakers would pass a big pension-reform package by month’s end.

“None of the public employees or none of the taxpayers have done anything wrong. They’ve done everything required of them. Everybody else, in my view, has either kicked the can down the road or not taken responsibility, so therefore we have to do it,” Emanuel told reporters.

“I do believe we’re going to get it done because it’s all in our economic self-interest, both for the retirees, the present public employees, the taxpayers, the businesses, family budgets, to get it done,” he said.

Contributing: Andrew Maloney

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