Pension Problems: Ald. Smith's Community Letter

Dear Friends,

In earlier newsletters, I outlined the pension issues facing our City. In October I co-sponsored a hearing at City Hall during which the City's pension plans admitted their dire underfunded status and described the huge property tax increases that would inevitably come if we do not solve our City's pension issues.

Cook County Commissioner Bridget Gainer and I recently held a town hall meeting on the pension problem and talked about potential solutions. This installment reports on that meeting. You can see the presentations from that meeting here.  

Today, the City's pension plans have $18 BILLION more in liability than assets.   While there has to be enough money in the funds to pay the pensions of the retirees for their lifetimes - but there isn't. In fact, last year, the funds paid out $872 million more than was taken in, including in investment returns. This means the pension funds will begin to run out of money in as soon as ten years.

But we learned at the town hall meeting that there is another liability in addition to pensions that is not accounted for: retiree health care liability. 

Many Americans, including city employees, retire before being eligible for Medicare at age 65. For many years, some employers, including the City, paid for medical care for retirees as an additional benefit. In 1992, the City attempted to end the benefits as a cost savings measure, leading to a lawsuit.

The settlement of the lawsuit provided that benefits would continue, with the City paying about 50% ($100 million last year), retirees 30%, and the pension plans paying the rest, continuing the drain on assets. Thissettlement expires on June 30, 2013, leaving city retirees without health care, but with a potential legal claim.

This is another unfunded and undisclosed multi-billion dollar potential city liability, and it must be addressed as part of the pension solution.

We face a common plight: city employees and retirees have insecure pensions and no reliable healthcare; city taxpayers face unaffordable property tax hikes - with no end in sight. 

What could happen? Below I outline three scenarios: do nothing, take unilateral action, and compromise.

If we do nothing, next July, retiree health care payments by the City cease. Without a doubt, everybody sues. Then, in 2016, property taxes increase 60% in one year to fund police and fire pensions solely. Property taxes will have to increase even more to pay for teachers' pensions. Or, faced with a fiscal crisis, the City could refuse to raise the property taxes. The State of Illinois would then be authorized to withhold the City's share of both sales and income tax proceeds: a sum equivalent to the amount of money the City spends on nearly every city service excluding fire and police. Then, starting in ten years, retired city workers begin to lose all their pensions anyway because the funds run out. Everybody loses.

In a unilateral scenario, in anticipation of looming insolvency, the pension funds file for bankruptcy. The court would have to sort out which retirees would obtain how much of the dwindling funds. Employees and retirees would be pitted against one another in court, and retiree healthcare would undoubtedly be eliminated.  Or, as nine other cities have done, the City could file for bankruptcy as its pension obligations overwhelm every other city need.

 Neither of these alternatives are palatable - compromise is the only way to obtain security for our pensioners, a reliable future for our employees, and affordability for the taxpayers.

In my next newsletter, I outline the possible solutions provided by compromising.

—43rd Ward Alderman Michele Smith