Chicago’s departing CFO urges caution on firefighter pension enhancements

Chicago can’t afford the estimated $3.2 billion price tag of a proposed state pension funding mandate for firefighters hired after 2010 without jeopardizing the city’s ratings upswing and forcing a property tax hike or public safety cuts, Chicago’s chief financial officer warned state lawmakers in one of her last acts in office.

Jennie Huang Bennett, whose tenure as CFO ended Monday when Lori Lightfoot handed the mayoral reins to Brandon Johnson, attacked the changes laid out in Senate Bill 1629 and 1630 that would raise benefits for employees hired beginning in 2011 when a Tier 2 pension system was established.

The changes are billed as needed to meet federal retirement rules and to honor a promise made to Chicago firefighters in 2019.

“It is an enormous cost to the city of Chicago. It would put in jeopardy our recent credit rating upgrades,” Bennett told lawmakers Thursday, citing S&P Global Ratings commentary that pension mandates could pressure the city’s ratings.

The city has drawn a series of upgrades most notably from Moody’s Investors Service which lifted the rating out from junk last year to Baa3 citing fiscal progress on structural balance and pension funding.

The city’s actuarial study conducted by Aon put a $3.2 billion present value price tag on the benefits through the city’s payment schedule that brings the police and fire funds to 90% funded in 2055 with the annual price tag at about $60 million rising to $311 million by 2055.

“Ultimately the only source the city of Chicago really has for this is either a property tax increase or alternatively to hit the corporate fund, the majority of which goes to police and fire resources,” Bennett told lawmakers during a House committee hearing, urging a delay in passage to give the incoming administration that will have to cover the cost time to opine on it.

It’s “one of the largest pension sweeteners in at least the last few decades in the state of Illinois.”

The legislation is pending before the General Assembly which is set to adjourn Friday. Sources said the votes exist to pass the bills but the situation is fluid.

Johnson is expected to weigh in on the bills this week with an eye toward striking an agreement to address what’s known as the “Tier 2 fix” that would be ready for the fall veto session and extend beyond the firefighters fund.

Sources said the bills still could pass in the interim while a more sweeping plan of action on Tier 2 is negotiated given that the firefighter plan changes actually call for pension contributions to come down for the first five years based on formulas.

The back-and-forth between Bennett, the firefighters’ labor group, and lawmakers at the hearing reflects a series of questions over the status of the Tier 2 plans, what changes are needed to avoid running afoul of Social Security rules, and the fiscal cost local governments and the state already awash in burdensome unfunded pension liabilities will eventually have to bear.  

Backers of the legislation argue it’s needed on two fronts.

The first addresses what experts have long warned is a benefits structure that likely violates the Social Security Administration’s Safe Harbor provision. It requires publicly sponsored benefits for participants who don’t also pay into Social Security at least match what they would have gotten from the federal government.

“The right thing to do is acknowledge the commitment you have and begin funding it the sooner the better instead of continuing to kick the can,” state Sen. Robert Martwick, D-Chicago, the Senate sponsor of the firefighter bills as well as several police pension bills, said in an interview Tuesday.  “Every day you delay a fix makes it exponentially more expensive.”

The second honors a promise made to Chicago firefighters in 2019 when the assets of suburban and downstate firefighter funds were consolidated into a single police fund and single fire fund.

“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 at the hearing. “I don’t think it’s a benefit increase … it’s a very minimal cost.”

The Chicago firefighters union initially opposed the 2019 consolidation because it wanted to be included. State negotiators promised to eventually provide the Chicago firefighters with the same Tier 2 fix for dropping their opposition.

“We weren’t opposed to it because we thought it was a bad idea or the wrong thing to do. We thought it was the right thing to do and we wanted to be consolidated. We wanted to be rolled in with our brothers and sisters throughout the state,” Senorski told lawmakers.

Opposition was dropped “with the promise that these two fixes would be handed out. Three, almost four years later, we sit here…the longer we wait sadly that price tag does increase,” Senorski said.

Additionally, the labor group aided the city in lobbying state lawmakers for tweaks needed to lure interest in a casino license on a promise from then Mayor Lori Lightfoot that a Tier 2 was coming, Senorski said.

Bennett said parity with the fix provided to suburban and downstate fund isn’t achieved in the bill because the suburban and downstate funds are reaping benefits from the consolidation that the city doesn’t have access to.

“Pension benefits will increase above safe harbor,” Bennett told lawmakers during the hearing that was reviewing a technical amendment to the bill before sending it on to the House floor for a final vote. It previously passed the Senate but a concurrence vote on the amended bill would be needed. “If you pass the benefits but you don’t pass the consolidation …it isn’t parity when you don’t have the entire package.”

Senorski said while he can’t speak for his board, he supports exploring consolidation. Martwick also said consolidation, which was pursued for the administrative savings it would achieve and the ability to leverage more investment funds, of the city funds into the statewide police and fire plans makes sense to explore.

Bennett urged lawmakers to hold off on passage to give the Johnson administration and his new CFO Jill Jaworski time to consider the impact and pushed lawmakers to seek an actuarial review arguing that potential Safe Harbor violations are a few years off.

While Bennett said she couldn’t speak to the new administration’s position, “ultimately they will have to find funding.”

Senorski countered that while he too didn’t know the new administration’s position, Johnson is strong supporter of labor having worked as a union organizer for the Chicago Teachers’ Union. “The mayor-elect comes from a background far different from any mayor we’ve ever had,” he said.

The bills would allow benefit increases to grow at a faster rate — the lesser of 3% or the inflation rate — from the original Tier 2 formula of the lesser of 3% or one-half inflation. The bill also restores the Tier 1 calculation on calculating final average salary.

Bennett also enlisted the City Council in a letter sent to members Friday urging them to join in seeking to put off a vote.

The Chicago Civic Federation submitted written testimony opposing the bills.

The federation urged lawmakers to “first conduct a comprehensive, statewide evaluation to determine when Tier 2 benefits will violate Safe Harbor rules before moving forward on any binding legislative changes,” acting President Sarah Wetmore wrote in testimony opposing the bills. “The solution should be thoroughly vetted, actuarially sound and the most cost effective of all possible options. Any pension benefits enhancements should be tied directly to Safe Harbor requirements.”

Once granted, the state constitution protects benefits from diminishment or impairment and the federation also worries that passage of the Chicago firefighter bills risks the same changes being made to all of the Tier 2 benefits in the state, which would be far more costly.

The amended version cleared the committee in a 7-2 vote.

“It’s a step forward. I don’t like it” but “none of us are talking about how to fix this in a holistic and final way because the bomb is going to go off,” Sen. Steve Reick, R-Woodstock said of the Tier 2 strains statewide.

Martwick said he hopes to bring together stakeholders and work over the summer toward a statewide fix that could pass in the fall veto session or the 2024 session.

Martwick says improved pension benefits could help recruit candidates for high volumes of teacher and police vacancies statewide. “I think this could be part of an overall benefits package,” he said.

Chicago carries net pension liabilities of $33.7 billion. Its firefighters’ pension is just 20.93% funded, while the police funded ratio is at 23.54%, the municipal fund is 23.41% funded, and the laborers is 45.92% funded. The city’s sister agencies have additional unfunded liabilities.

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 of about 44% to 45%. Illinois carried $139 billion of unfunded liabilities for fiscal 2022 for a collective funded ratio of 44.1%.

A Tier 2 fix raising the pensionable salary cap is included in the latest version of a bill enshrining Cook County’s supplemental contributions into law by establishing actuarial pension contributions. The county has been making supplemental contributions with proceeds of a sales tax hike but needs legislation to overhaul the payment structure.

Cook’s pension changes that will be folded into House Bill 2352 have long been in the works with the county, labor, and the pension fund mired in debate over details. The county appears to have given up efforts to increase its governance presence on the pension fund’s board while retiree healthcare will be addressed through an intergovernmental agreement.

Martwick said he expects it to pass before the session ends.

Chicago police bills similar to the firefighter bills and a separate bill that makes permanent a cost-of-living adjustment based on birth date are slower in the review process so unlikely to pass this session.

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 for firefighters.

That enhancement for 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.