A so-called “fix” for Chicago’s “Tier 2” firefighters to ensure benefits meet federal requirements carries a $350 million price tag.

That’s what officials told a House committee that moved the bill forward over the city’s objections. And a police “fix” carries a more burdensome toll of at least $1 billion, sources said.

“The city of Chicago must oppose Senate Bill 1630 simply for the fiscal costs associated with this proposal,” Derek Blaida, of Blaida & Associates LLC who represents the city, told the House Personnel and Pensions Committee at a hearing Thursday. “As of today, and obviously assuming everything stays the same throughout the actuarial analysis, over the next few decades the projected cost of this bill is approximately $350 million to Chicago taxpayers.”

Local and state officials have heard warnings for years that the level of benefits provided to what’s known as “Tier 2” public employees — those hired after 2010 when a lower level of benefits were enacted — likely violates the Social Security system’s “safe harbor” provision. It requires that public pension plans provide at least the equivalence of what Social Security offers to employees who are not also entitled to SSA benefits.

“This is the same pension fixes that were made for the downstate firefighters consolidation to avoid safe harbor triggers,” Joe Senorski, who represents Chicago Firefighters Local 2, said in support of the bills. “I don’t think it’s a benefit increase … it’s a very minimal cost.”

While city, pension fund, lawmakers, and fiscal watchdogs differ over the urgency of enacting a fix now without a deeper analysis in hand of just how short of the federal requirement Tier 2 falls, the legislation’s Senate sponsor said the state is making good on a promise Chicago’s police and fire funds that dates back to 2019.

“There was a promise made that the Chicago funds would receive the same benefit as the suburban and downstate funds,” said senate sponsor Sen. Robert Martwick, D-Chicago, who chairs the Senate’s pensions committee.

The firefighters legislation — Senate Bill 1629 and 1630 —was passed March 23.  The police “fix” is laid out in separate legislation and it remains pending in the Senate. Martwick said it’s not yet clear whether that legislation will advance during the current session but that aside from being promised, the “fix” must be made for police too as well as for the state and other local government funds to meet the federal rules.

The Tier 2 “fix” was included in the Gov. J.B. Pritzker-backed plan that consolidated the assets of 650 suburban and downstate public safety funds into a single police and single firefighters’ fund. The pension Chicago firefighters and police bills offer the same.

They raise the calculation to reach the pensionable salary cap and restore the higher Tier 1 final salary cap to a formula based on the average of the highest four of the last five years, instead of the average of the highest eight of the last 10 years.

Mayor Lori Lightfoot, who leaves office May 15 after losing her re-election bid, attacked the pending bills that she warned add to the costs. ”We don’t need a bunch of unfunded mandates for pensions,” Lightfoot said during a discussion Tuesday of an updated fiscal forecast with the city’s finance team.

Lightfoot’s comments followed Chief Financial Officer Jenny Huang Bennett’s warning that “having more burdens being placed on the city of Chicago, i.e. increased costs is very difficult” and pose an “extraordinary burden.” The cost of the bills have not been factored into the city’s fiscal forecast.

The Chicago Civic Federation is among those that believes Tier 2’s failings require more analysis before the leap is made to fix them.

“Tier 2 benefit changes were imposed by the state of Illinois for nearly all funds over a decade ago and therefore the Civic Federation believes there should be a statewide analysis of if and when plans could fall short of IRS safe harbor provisions ensuring minimum benefit standards before any changes are made to benefits for any individual fund,” Sarah Wetmore, acting president of the Chicago Civic Federation said in an email. “Our understanding is that there is time to do this full analysis and develop a comprehensive solution.”

The federation supports a solution that would meet the minimum necessary requirements to comply with federal rules but does want other unrelated benefits added that would strain governments and run counter to the aim of establishing the lower level of benefits.

“Doing one-off ‘fixes’ based on who can get their bills passed in Springfield is not the most effective or efficient way to address this potential problem, particularly since once granted, pension benefits become protected by the Illinois Constitution’s pension protection clause,” Wetmore said.

With burgeoning unfunded pension liabilities straining the state and local governments and benefits for current employees protected by an airtight state constitutional clause, lawmakers passed Tier 2 legislation in 2010 reducing benefits for most public pension funds statewide. In addition to the pensionable salary and salary cap limits, the new tier raised the retirement age to receive full benefits.

Stakeholders widely agree that Tier 2 fixes will eventually be required. A 2019 estimate put the cost for the state’s five funds alone at $2 billion. If pensions fall short of the safe harbor rule, the state would face penalties and employees could sue.  

Cook County legislation still being negotiated between the county, its pension fund, and labor that moves to an actuarially determined contribution is expected to include a Tier 2 fix although details are still being debated. The county has been making supplemental contributions with proceeds of a sales tax hike but needs legislation to overhaul the payment structure.

Unfunded liabilities weigh on the city, Cook County, other local governments, and the state’s ratings and budgets.

The city’s net pension liabilities rose to $33.7 billion from $32.96 billion for 2020 due to various assumption changes that are key factors into calculating the unfunded liabilities. The firefighters funded ratio is just 20.93% while the unfunded tab is $5.5 billion. The police funded ratio is at 23.54% and the net pension liability $12.5 billion. The city’s municipal fund is 23.41% funded and carries a $14.1 billion net liability tab. The laborers is 45.92% and net liability at $1.57 billion.

Cook County has a $6.3 billion tab and funded ratio of 67.2%. Suburban and downstate public safety funds carry collective unfunded liabilities of $13 billion and an average funded ratio about 44% to 45%. Illinois carried $139 billion of unfunded liabilities for fiscal 2022 for a collective funded ratio of 44.1%.

Lightfoot has pushed back against other state actions on pensions to no avail.

Over Lightfoot’s objections, Gov. J.B. Pritzker signed legislation in 2021 that made permanent a cost-of-living adjustment enhancement lawmakers previously approved every few years, meaning the full cost was never accounted for in actuarial assessments

The enhancement for some Chicago firefighters adds $180 million to the fund’s existing $5.29 billion of unfunded liabilities and $16 million to $17 million in additional annual costs that add up to $700 million by 2055, according to a 2022 review from Segal, which conducts the fund’s actuarial valuations.

Lightfoot and the Chicago Civic Federation sounded alarms that the city couldn’t afford what city officials had estimated then was $18 million to $30 million in additional annual contributions.

Bennett has warned the similar tab for police, if that legislation is approved, could drive up annual costs by $90 million with the total price tag hitting $3 billion. The slightly lower price tag for the firefighters from initial city projections likely means the police cost is likely lower too, but it would still be big.

The 2021 legislation brought all firefighters in the city’s older tier one benefit scheme up to a simple 3% annual increase. Firefighters with certain birth years had previously eliminated some from the benefit. The city had long made the upgrade every few years as birth dates hit.

Martwick has defended the legislation as a more honest approach. “This is about transparency and long-term common sense that saves taxpayers in the long run,” Martwick said.

With a new mayor coming into office next month just days ahead of the session’s scheduled adjournment, Martwick said this week he would wait to pursue the matching police birth age bill.

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