To subscribe to Capitol Fax, click here. RNUG: Vallas’ plan “appears to make Chicago’s pension problem manageable” Friday, Jan 18, 2019 * Paul Vallas announced his pension plan yesterday. It’s long, but worth a read… While there is much talk of a “grand compromise” to be reached with labor, state and local governments and the business community to amend the Constitution to address the City’s pension funding needs, it is unlikely to happen even if Governor-elect Pritzker had not voiced his opposition to such an amendment. As for the talk of changing the benefits for new employees who would not be protected by the Constitution, that has already been done. Employees hired after 2010 became Tier 2 pension participants at far lower benefits. Tier 2 employees contribute much more than what it takes to pay their own benefits and are, in fact, subsidizing Tier 1 retirees. This, in itself, could create future legal problems. It is highly unlikely there would be support for a further diminishing of new employee future pension benefits. I oppose any changes to new and old employee benefits. The underlying pension funding problem is in large part the result of inequities in State funding which discriminated against Chicago Teachers and the City’s irresponsible decision to secure, through State legislation, a “Pension Holiday,” that allowed it to skip payments to all City-funded pension systems. The Police, Fire, Municipal Employees, and Laborers were all victimized by the pension holiday. The City also secured a pension holiday for the Chicago Teachers Retirement System. It is ironic that the leadership of a number of unions’ leadership has orchestrated the endorsements of candidates who supported the underfunding of the systems. […] The plan includes supporting a legislative agenda that protects the statutory local government share of any increase in the State Income Tax that Governor Pritzker and the legislature enact, restores the illegal diversion of Corporate Personal Property Tax revenues that occurred during the previous administration, and phases in, over ten years, full State funding equity for the Chicago Teachers Retirement System. The first two items are things every municipality and county will be supporting and could be phased in over the next four years during the pension ramp-up. […] I have identified a number of specific budget areas where I believe the growth in City non-pension spending could be reduced over the next five years to provide the balance of what is needed to meet the City’s pension obligations. These areas include overtime, contractual services, worker’s compensation, healthcare, and more. Just a five percent reduction in base spending over the next five years would enable the City to meet the balance of the pension funding ramp up. By 2023, the State mandated annual increases in pension contributions will be much more moderate and financially manageable - not only as a result of the almost doubling of contributions, but because of the increasing numbers of Tier 2 employees in the system. While some have advocated for the earmark of revenues from a City Casino or a tax on cannabis to fund pensions, I would be cautious about making pension funding contingent on uncertain and unproven revenue sources that would at very best provide barely a fourth of what would be needed to meet the City’s pension funding obligations. Furthermore, we have been waiting for casinos for years and, even if finally approved, the full the revenue impact would be uncertain and not immediate. Funding for pensions should not be tied to unreliable revenue sources. Pension funding should be in the form of a “direct intercept” in the budget of the actuarial determined annual amount needed to ensure the system’s pension funds are on a 30-year full funding schedule. As a contingency against delays or partial success in implementing the Springfield agenda and a hedge against unanticipated expenditure increases the City could consider issuing a Pension Obligation Bond financed through the revenue windfall from expiring TIFs. This would protect the City’s existing revenue base from further securitization, while providing a substantial increase in the amount invested in the retirement systems, thereby significantly reducing the increase in the annual contribution. A Citywide TIF would be created to capture the revenue from expiring TIFs, the revenues of which could be dedicated to pension funding. The City would have the flexibility of using the revenues to immediately finance the POB to immediately improve the health of the system the unfunded [MG1] Even if the TIF was not used to finance a POB, the dedication of future TIF revenues would have a positive impact in the calculation of the long-term unfunded liability. Given the City’s direct funding of the Chicago Teachers Retirement System, the Pension TIF could earmark all but the County’s share of the revenue from expiring TIF’s. Resolving the pension funding issue must also include reforming pension fund investment practices. This involves creating a Pension Investment Board of local investment professionals and taking the pay-to-play politics out of investment decisions. Often politicized and all too often lacking in real investment expertise, pension fund investments have historically produced disappointing returns and have sometimes been scandalous. There should be a consolation of pension investments for cost efficiencies and to ensure the highest rate of return. Although data from the pension funds are hard to compare because returns vary across time periods, it is not unreasonable to think that if all the big pension funds in Illinois paid fees and produced investment returns that were achieved by the Illinois Municipal Retirement Fund (IMRF), which is 90% funded, the additional earnings would approach $1 billion statewide. If you had a board of Chicago’s most accomplished local investment professionals making investment decisions, do you think that Robert Vanecko and his investment strategy would have been the recipient of tens of millions of dollars in substandard investment strategy that cost the police pension $54 million? With the City’s pension funding issue addressed and the City’s commitment to its public employees met, the City’s “non-pension” expenditure obligations needed to fund City services could be secured through natural revenue growth allowing property taxes to be permanently capped for homeowners, landlords and businesses, at no more than 5% or the rate of inflation whichever is less. F could be frozen, and fines reduced to no more than the cost of the license or dedicated to neighborhood infrastructure improvements, and services and ees ticket. Additional revenues from a casino, sports betting and video poker could be proceeds from the tax on cannabis could be dedicated to rebuilding the critically needed social service infrastructure in poor communities like mental health and wellness, health care, legal aid, family counseling, drug and opioid addiction. * I asked our resident pension expert (and 2018 Golden Horseshoe Award winner) RNUG to take a look at it… Some interesting items in it. First observation is he’s counting on significant State money, about half of all the money needed. Admittedly not in the form of a direct bailout so much as trying to regain various revenue sharing the State previously clawed back. The political calculation of doing this for the entire state is smart. Not sure what he means by Full State Equity for Chicago Teacher’s Retirement System unless he means either trying to undo the former deal giving Chicago control over it or looking for the State to take over those pension payments or just looking to get the State to kick in more money with Chicago still having control over it. Not sure about the politics, so it will depend on if Vallas can round up the votes in the GA. Think this is a harder challenge than increasing revenue sharing. Interesting approach to grabbing expired TIF funds and either using them directly or as a payment stream for Pension Obligation Bonds. Was definitely looking for unused / dormant sources of cash. And the 5% operating cut seems reasonable; you can usually find that amount of waste / fraud / abuse. And he isn’t counting on the State actions by having a plan to cover at least half of what is needed. Smart and flexible planning. Got to give Vallas (or his advisors) credit for some serious thought and creative out of the box thinking. His proposed plan appears to make Chicago’s pension problem manageable. I don’t really follow Chicago politics per se, but I’m going to guess he may, if mayor, be able to get 75% of what he wants … and that would be huge. - Posted by Rich Miller

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