I have been asked by members what I think of the City’s budget that passed the City Council in November. As a trustee of our pension fund I like the budget because it finally levies enough property tax to start funding our pension benefits based on sound financial principles – principles that have been neglected for at least the past several decades. The property tax levy for the firefighter’s pension fund is $359M, or 40% higher than last year’s property tax levy. The City will need to find this additional revenue over the next several decades in order for the Retirement Board to be able to make the pension payments it is required to make to the retirees. So to put this into perspective, several decades of mismanagement of our pension fund’s health now requires several more decades of increased contributions – that is over a sixty year time span. You can fit a lot of generations in that time period, and it is telling which generations pay more and which get more. Economists often speak in terms of transferring wealth from one generation to another. When talking about fairness, generational transfer of wealth, or fiscal prudence, it is the concept of matching the costs with the benefits that is relevant – the City’s 2021 Budget and need to pay for pension benefits previously earned is no different.
Looking at the City’s property Tax Ordinance provides some key insights into this concept – identifying who benefits and who pays. The chart below compares the current property tax ordinance with the prior year’s. The chart illustrates the amounts the City is requesting from property owners in 2021 for specific funds operated by the City.
When viewing the 2021 levied amount of $359M for our pension fund in the context of the year over year overall tax levy for the City, a concerning fact develops. Both the police and firefighter’s pension funds are receiving a combined increase of $311M in levied property taxes from 2020 to 2021. From my perspective as your pension fund trustee, who is adamant the fiscal integrity of our pension fund is maintained, I’m very happy to see this increased funding for our pension fund.
However, there are two key questions that present themselves to me when I look at this schedule. First, why is the funding to our pension fund so high this year compared to last year? And , second, where is the City of Chicago coming up with this additional money?
This year’s funding doesn’t just represent the cost for benefits earned this year; the massive increase in property taxes needed to fund the pension funds is attributable to pension benefits earned many years ago. How much more do taxpayers have to pay this year for benefits that taxpayers in the past should have paid for? The normal costs, which represent the benefits earned just for the year, are $64M. So, of the $359M the taxpayer have to put into our pension fund next year, only $64M is attributable to the benefits earned that year, the remaining $295M is needed to start chipping away at the unfunded benefits that were never properly paid over the past several decades. That is a significant difference and represents the fiscal cost of stakeholders failing to be fiscally responsible and that significant difference will need to be paid every year for the next 35 years.
What is concerning, and what brings me back to the concept of generational wealth transfer, is where the City comes up with this increased $311M in funds for the police and fire pension funds. If you have been paying attention to the news, the City was proposing a $94M property tax increase. How does the City fund an additional $311M for police and fire pensions from property tax revenue if the annual tax levy increase is only $94M. Well, as the chart illustrates, the City is reducing the tax levy for bond payments by $318M. Unfortunately, the City is returning to the habitual practice of ‘scoop and toss’. Scoop and toss is essentially not paying bills as they become due (scoop) and instead pushing them out further (toss) for later generations to pay. It is similar to taking all your credit card minimum payments for the month and putting that cost on a new credit card and hoping things work out next month. It isn’t just bond payments the City has been scooping and tossing, they have also been scooping and tossing our pension debt for decades. The City has been scooping and tossing fiscal liabilities for years with little if any criticism coming from other stakeholders of the City’s fiscal integrity.
Why do I care? As a trustee on the firefighter’s pension fund and a fiduciary to you, my primary focus is making sure the pension fund is properly funded so we can continue making promised benefit payments. So, you may be thinking, who cares as long as the property tax levy is now adequately funding our pensions. The health of our pension fund’s plan sponsor, the City of Chicago, is intricately related to the health of our pension fund and should therefore be concerning to us all. Additionally I ask, where is the outrage of this budget continuing to push debt and financial burdens onto future generations.
I understand the immediate threat to our retirement security has been temporarily put off, but if the City as plan sponsor hasn’t identified a way to fix the structural weakness in their overall budget, this issue will affect the next generation of firefighters and paramedics. This doesn’t exactly support the Chicago Fire Department’s motto of – Leave the Job Better for the Next Guy. I understand the hope is for a casino to provide this increased required revenue for our pension fund, but that opportunity seems less and less certain and is years behind schedule. The City cannot scoop and toss forever, eventually those bonds need to be paid. The choice of alternating between addressing bond debt and pension debt cannot continue indefinitely, eventually they both have to be addressed. My fear is that the ultimate battle between the municipal bondholder debt and the pension debt will eventually be fought in the same arena it has historically been fought – federal bankruptcy court.
But the real question Local 2 members should be asking is where were the public unions during these scoop and toss years? Why wasn’t Local 2 more involved and outspoken with the deals to sell toll-roads, parking meters, garages and any other public asset? Why was Local 2 silent as the City didn’t honor the pension debt owed to our pension fund each year? Local 2 has been, and continues to be, financially illiterate and therefore not involved in the decision making process that effects its members. That needs to change. Local 2 President Jim Tracey has stated in the past that Local 2’s concern is enhancing pension benefits and the funding for those benefits is the responsibility of the pension board. I couldn’t disagree more with Jim’s view of his responsibilities and feel his time would be better spent looking after the City’s finances and the administration of the fire department than pursuing a political career representing the fire service at the International. Given the unbelievable poor shape Chicago and its fire department finds itself, why would anyone at the International want a representative from Local 2 involved in the affairs of the International? The members of the Chicago Fire Department, in return for their hard work and dedication, not only must live in the City with onerous taxes, but have to deal with a pension fund with an 18% funding level, upper management that seems to be struggling at every turn, and a State and local political environment that has the politicians we recklessly contribute to looking at substantial time in a federal penitentiary for criminal activity. Local 2 wants to import this ‘strategy’ to all the locals in the International? If the IAFF adopts Local 2’s current strategy I think our membership really needs to reconsider a floor vote and decide if we shouldn’t just keep the $1M we send the IAFF each year.
Brothers and Sisters please pay attention, it is your Union and what you do on the Job today will affect the members that come on after you. Merry Christmas to you and your families!
Timothy McPhillips
Pension Fund Trustee
This newsletter is my opinion only and clearly is not the opinion of the Retirement Board of the Firemen’s Annuity and Benefit Fund.
