We'll all feel pension pain

Properly funding system will cost taxpayers, city workers greatly

Thursday, April 22, 2010

Chicago taxpayers will be forced to dig deeper -- and so will city workers -- to bail out four city employee pension funds that will run out of money by 2030, a Mayor Daley-appointed commission has concluded.

"There is no low- or no-cost solution to this problem. . . . Deferring action is not a viable option," said a draft of the final report, obtained by the Chicago Sun-Times.

"We cannot invest ourselves out of this funding gap. . . . Closing it will require substantial actions [in three areas]: benefits, employer contributions and employee contributions. Employer contributions need to be funded through real commitments, likely including new revenue sources."

The pension commission -- co-chaired by Daley's current and former chief financial officers -- does not recommend a specific tax. But the need is staggering.

The combined unfunded liability of the Laborers, Municipal Employees, Police and Firefighters pension funds now stands at 42 percent, down from 62 percent just two years ago and 80 percent in 1996.

To reach a 90 percent ratio over 50 years -- assuming annual investment returns of 8 percent -- would require $710 million more each year. Sixty percent of that would come from taxpayers, 40 percent from city employees.

Without benefit reductions, that would require the equivalent of a 52 percent increase in the city's property tax levy and 8 percent more from city employees.

"The take-home pay of a $50,000-a-year [city] employee would fall by $4,000," the report states.

With reductions -- everything from reduced maximum benefit and a higher retirement age to lower cost-of-living increases and a pension cut for new employees -- the annual gap could be reduced to $510 million.

A two-tiered pension system for new and existing employees will "probably be necessary," even though it "poses serious moral issues," could hurt employee recruitment and "might be subject to challenge" in the courts, the report concludes.

The report suggests that higher contributions from both sides could be phased in over a four- or five-year period, possibly coinciding with scheduled pay hikes "so employees do not suffer a [cut] in take-home pay."

"For the city, new revenue sources can be gradually phased in and taxpayers given time to adjust. These advantages may make the needed changes more politically practical," the report states.

In January 2008, Daley created a 32-member commission drawn from labor, business and banking to confront the pension crisis that's choking local taxpayers and gobbling up Chicago's annual property tax levy. Since then, stock market losses and the housing crisis have compounded unfunded liabilities.

If the pension funds run out of money, Chicago taxpayers get stuck with the tab.

Last fall, Daley responded to the Chicago Sun-Times' "Pension Bonanza" series by saying he would entertain myriad solutions to get the pension monkey off taxpayers' backs.

He cracked the door open to raising the retirement age from the current minimum of 50. He said he would consider raising employee contributions and implementing a two-tiered pension system for new and old employees.

Union leaders have long opposed a two-tier approach on grounds that it would create a caste system among rank-and-file members.