By: Mark Glennon*
A new bill pending in the General Assembly provides a nice reminder of how bad off taxpayers and service recipients would be in Chicago if there’s not enough money to cover everything. Property tax increases are now mandated by state law, gradually ramping up to whatever-it-takes amounts to fund the city’s pensions. The bones are being picked over multiple times by pensions and bondholders. When things hit the fan, there won’t be much money left for anything else. The bill also illustrates an interesting question about payment priorities between pensions and bonds.
The General Assembly earlier prioritized pension contributions over services by providing that, if Chicago ever fails to remit the annually required contributions to its pensions set by state law, the shortage could be subtracted out of funds that flow from the state to the city. That flow of money is in the billions and is critical to the city. The state must then deposit those amounts into the pension that got shorted. In other words, money such as the city’s share of sales taxes would be intercepted and used for pensions instead of other city needs.
The new bill, HB 4224 is sponsored by Rep. Robert Martwick, a Chicago Democrat. It adds a requirement that rules made by the Comptroller will guide any interception of state money for the Laborers’ fund, one of Chicago’s four pensions. That would be Chicago Democrat Susana Mendoza. How nice.
The bill also changes the language about the Comptroller putting money into the pension from “deposit” to “remit.” The purpose of that change isn’t clear. I emailed Martwick for an explanation but got no answer. Maybe it’s unimportant, but that’s not the point. Instead, think of this as a reminder of what’s going on.
All four Chicago pensions now have basically the same protection as the Laborers’ fund, allowing for that interception of state money, which is critical for Chicago.
More importantly, all four pensions are now also protected by state law that mandates a Chicago property tax increase to cover the drastic up-ramp in scheduled pension contributions. Those mandatory property tax increase got virtually no press coverage, but it’s true. You can see an example of the mandatory language yourself in line 9 of the existing law, which is also shown with the bill: “the city council of the city shall levy a tax annually [to meet the ramp].”
Similar mandatory tax increases protecting Chicago’s police and firefighter pensions were added in 2016, as we described earlier. For the fourth pension, the Municipal fund, Chicago Democrats snuck the automatic tax increase into last year’s 756-page budget implementation bill (beginning around page 380) that most lawmakers had only hours to review.
So, Chicago Dems have prioritized pensions in two ways — forced property tax increases and the interception of state money.
And what is the pension contribution schedule that’s protected? It’s this huge ramp up, which Chicago finally published last year:
Be aware, however, that we really don’t know how far up that ramp will go. Beginning in 2022 and 2023, the requirement is a form of ARC — actuarially required contribution. That basically means it’s whatever it takes to get the pensions to 90% funding 25 years from then.
“Hold on a minute,” you might ask. Didn’t the state also just put bondholders first by authorizing a new form of bonds backed by sale of money owed to cities by the state? Yes, it’s intended to work even in bankruptcy. We wrote about that new law as it moved through the legislature and many others have since (one Bloomberg article is linked here).
What’s interesting is that the authorization also included a “non-impairment” provision, which basically says the state must refrain from doing anything that would undermine the new structure protecting bondholders’ ownership of money coming from the state. Doesn’t that conflict with the law that allows the Comptroller to intercept those same monies to pay pensions?
It seems like a conflict to me but I haven’t seen the issue discussed. Chicago’s new bond issue provides for the sale of up to $3 billion of sales tax revenue that comes to it from the state. Who would get that money if Chicago started defaulting, bondholders or pensions through the Comptroller intercept? I can’t tell.
The point here is that pension protectors and the municipal bond juggernaut have been aggressively passing into law whatever they can to ensure they come first if the city doesn’t have enough money for everything.
Who’s doing the same for taxpayers and those who rely on city services? Not Chicago Democrats.
*Mark Glennon is founder and Executive Editor of Wirepoints. Opinions expressed are his own.