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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.

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Michael

Has anyone calculated what the taxes per year would be on a $300 – 400k house in Chicago or in the suburbs be over the next 5-10 years to cover the increasing liabilities?

jaherzrent

Public workers and their new allies in multiemployer plans (e.g. Teamsters) will continue to press for federal bailouts. With so many legislators up for election this November, it’s important for the unions to create as much economic chaos as possible, in the expectation that candidates will trip over each other promising a fix. Trump has not yet been heard to say he’d veto such legislation. One fears he might sign it on behalf of truck drivers and public safety employees. The PBGC is also broke and needs a bailout. Captains of industry join in the fun. The alternative is cascading… Read more »

Steve-Oh

GR8 article Mark ! Holy cow, it’s a house of cards destined to fall apart. And the legislators don’t care how much they fleece the taxpayers along the way. Eventually they’ll be confiscating houses for failure to pay prop taxes, then selling the house with $ going to pension plans. All because of egregiously large pensions paid ridiculously too early in life, to govt ees who ‘serve’ the public….but it’s the other way around.

Doug

Only problem is that the confiscated homes will be abandoned and next to worthless since the property taxes are too high. Pensioners are screwed and they will go down the scorched earth path taking down with them as many taxpayers as possible.

Stv-Oh

God, Doug, right, that’s a scary way to phrase it but spot on correct, it seems !

Adam

There will be a pension collapse long before they would start taking peoples’ homes. Taking peoples’ homes would cause riots and economic collapse. Not realistic. What is realistic is that the pensions are doomed.

Stv-Oh

Homes are already confiscated when in arrears. Sometimes they’re worthless as Doug says, other times not and city gets a little equity. Terrible either way.

Adam

I meant on a mass scale. Won’t happen. A one time sell off won’t make up for a bunch of empty homes with no one to pay property taxes on.

NB-Chicago

fantastic writing once again-thank you mark. if passed, yet another example of the state choosing to apply individual rules to individual (chicago) pension funds and not others? how can state choose to bail out cps/ctu/chi prop owners with horrible school funding deal and turn around and impose automatic prop taxes increases on other city pensions? and not automatic prop tax increases on all the other zillion underwater municp pensions in the state? what municipality pension fund next will state target to impose rules that apply only to that municipality?

NB-Chicago

if your a suburban home owner then under the school funding / pension bailing out deal of cps/ctu/chi home owners then you got to feel you chumped -where’s my bailout? likewise, if your a pensioner in any one of the zillion of underwater municipal pensions then you would have to feel the martwick bill favors only clout heavy chi pensions–where’s the mandatory prop tax hikes dedicated to my promised pension deal? you can’t pick and choose who’s going to get bailed out and who’s not. or maybe only in ill you can. it’s grab for what you can get time.… Read more »

Erik

So when do the state legislators pass a law stripping down-state dirt people like me of state sales tax revenue to prop up the Dem stronghold of Chicago when Chicago can’t fund itself? To some extent they’ve already done that with CPS.

Great article Mark. Thank you for your efforts to get the word out. I can’t find this kind of information anywhere else.

K L

Haha. Maybe the non-impairment provision (no doubt meant to stymie any future reformation) conflict can be resolved by bond holders / pensioners guessing which of Mendoza’s hands the money is in, alternating turns at guessing. To be fair to them, of course.
Because, well, citizens are dirt.
My god, it just gets worse and worse. The mind reels and we’re so screwed.

nixit

INTERCEPT – Excellent choice of words. Please keep using it.

Bruce ross

Thanks for reporting on this dismal subject. Would the liberal ruling class in Chicago just say “nothing here just move along?” A response from the democrats to this information would be great.

Mark M

I realize it is difficult to predict the future, but it has long been my view that the pensioners will be treated significantly better than the bond holders, despite the fact that the latest tranche of bond holders have liens, and notionally the protections which property rights (and the Constitution) provide. Desperate times will lead to unprecedented outcomes. The prospect of pensioners turning overnight into welfare cases will prove to be politically powerful. Although respect for rule of law and property rights is essential to a market economy, these things are not high on anyone’s list on the progressive left.… Read more »

Love the use of the word “mendicant”