City to borrow $78.4 million to pay for firefighter settlement
BY FRAN SPIELMAN City Hall Reporter firstname.lastname@example.org October 23, 2012 2:04PM
Mayor Rahm Emanuel at Nokia, 425 W. Randolph, Tuesday, October 23, 2012. I John H. White~Sun-Times
Updated: November 25, 2012 11:39AM
Chicago will borrow the $78.4 million needed to compensate nearly 6,000 African-American would-be firefighters bypassed by the city’s discriminatory handling of a 1995 entrance exam, Mayor Rahm Emanuel said Tuesday, compounding the cost of a settlement that’s already twice as high as anticipated.
Emanuel said the city anticipated the higher-than-expected tab and tucked it away into a general obligation bond issue normally reserved for infrastructure repairs and equipment purchases. General obligation bonds are backed by property taxes.
Since Chicago is self-insured against most claims, settlements are normally paid for with funds set aside in the city’s judgment fund.
The city is insured only against catastrophic claims exceeding $15 million. The $78.4 million settlement would have been covered by insurance, but the discrimination in the Chicago Fire Department pre-dated the catastrophic claims policy.
“We have bonded for it in 2012. ... We have dealt with that issue. That’s what good budgeting does. We planned for that and bonded for it back then. So, it doesn’t affect the budget,” the mayor said at an unrelated news conference.
A reporter noted that the approach “sounds expensive” because the cost of paying interest on borrowed money would compound an already high cost.
“That’s one perspective. There’s another perspective. We had a Fire Department that was also found [to have] discriminated. I want to make sure that we never again have the experience we had in the past where we had policies and practices in place that discriminated,” the mayor said.
“From a management standpoint, we prepared ourselves,” he said. ”We bonded for this back in the spring or summer so it wouldn’t impact the budget. I made sure we also brought a class of African-American firefighters in, and they’ll be graduating soon. And I want to make sure that the practices and policies of the past don’t ever repeat themselves and we have a diverse Fire Department.”
In its defense, the Emanuel administration cited three multi-million settlements that were financed by last year’s general obligation bond issue. Those three settlements totaled $10 million.
Matt Piers, an attorney representing black firefighters and wannabes, said he’s not at all surprised Emanuel is borrowing the money.
“It’s always better to have cash on hand to pay these things. But, this administration inherited a nearly broke city government. So, I’m not sure they had an alternative,” said Piers, a former deputy corporation counsel for the city.
“At the moment, interest rates are so low, it’s probably as good a time as any to borrow money. But ultimately, you’ve got to figure out a way to pay back a loan. That’s what a bond is. [But], this is not a problem of their creation. They inherited it. I guess you could say they should have anticipated it. But, they had a huge hole.”
Civic Federation President Laurence Msall said he’s “disappointed that the city is borrowing to pay for, what is essentially an operating cost. ... Rather than adequately budgeting for known and expected tort claims, the City of Chicago has, for many years, spent all of its revenues and additionally drained its parking meter and other asset lease reserves.”
He added, “It is very unfortunate that this discrimination occurred. However, by using borrowed money to pay for the settlement rather than making a one-time payment out of existing city revenues or reserve funds, the cost of this settlement to taxpayers will be compounded by the interest costs and will be much more than the $78.4 Million settlement amount.”
Going forward, Msall urged the mayor and City Council to “more effectively manage its risk” by maintaining “a more healthy level of budgetary reserves” to accommodate judgments “and many other unplanned expenses such as snowstorms, revenue shortfalls or damage claims.”
The Chicago Sun-Times reported this week that City Hall must pay $78.4 million by Dec. 26 — twice as much as previously anticipated — to compensate nearly 6,000 African-American would-be firefighters bypassed by the city’s discriminatory handling of a 1995 entrance exam. That’s twice as much as previously anticipated.
Back-pay alone for the 5,850 people who did not get jobs will total $59.7 million, according to Piers. Of that money, $51.4 million will be distributed to individuals. The remaining $8.3 million will be deposited in the firefighters pension fund as the employees contribution for the 111 lucky enough to get hired.
The city is also responsible for contributing another $18.7 million for its share of pension liability for the newly hired firefighters.
That brings the total tab to $78.4 million. The checks must go out and pension deposit made by Dec. 26, according to court order.
The price tag is double the anticipated amount because prior estimates were an “educated guess” that “turned out to be way too low once we got payroll data that allowed us to calculate actual wage increases over time,” Piers said.
The 1995 firefighters entrance exam was drafted by an African-American with an eye toward diversifying a Chicago Fire Department with a long and documented history of discrimination.
When results for minorities were disappointing, the city established a cutoff score of 89 and hired randomly from the top 1,800 “well qualified” candidates.
In 2005, a federal judge ruled that the city’s decision had the effect of perpetuating the predominantly-white status quo because 78 percent of those “well-qualified” candidates were white.
Five years later, the U.S. Supreme Court unanimously agreed that African-American candidates did not wait too long before filing their lawsuit.