As many of you know, or at least should know, the health and security of our pension fund is dependent on a successful launch of a Chicago casino. Traditionally, the City funded their portion of our retirement security through property taxes; however, because that revenue source has been mismanaged, the Lightfoot Administration is reluctant to raise property taxes any further to fund our pensions. The Chicago real estate market never fully recovered from the real estate bubble of a decade ago, and politicians are leery of raising property taxes in a market that is having difficulty growing and susceptible to over taxation. The Case-Schiller 20-City Composite Home Price Index went up 49.4% over the last 10 years while Chicago’s only grew 11.7%. Using this index, if you bought a $300,000 bungalow 10 years ago in Chicago, it is only worth $335,067 today. By comparison the same home, on average nationally, would be worth $448,162. It is no secret that Chicago’s residential real estate has not kept pace with the rest of the country, which makes raising property taxes to fund our pensions a difficult proposition. If our fund was properly funded, the incremental property taxes required to cover the costs of benefits earned just this year, referred to as the normal cost, would be very manageable. The issue is not that Chicago’s property tax base is inadequate to support our benefits, it is that the property tax base is inadequate to make up for the decades of neglect of our pension fund. We need to make the best of alternative revenue sources available to the City so they can meet their financial obligations to our pension fund and ultimately our retirees. It is not enough for Local 2 or the pension board to take the stance it is the City’s obligation to fund the pensions so let them worry about it. We need to be involved in the City’s budgeting process to secure funding.
I think it is important that the membership understands that any proceeds from a Chicago casino are required to be utilized to pay amounts due the police and fire pension funds in any given year. The chart below shows the amounts the City is required to fund the fire and police pension funds over the next decade. The year 2021 is important because that is the year the City begins to statutorily fund the pensions based on actuarial required contributions (ARC). Most financial experts agree that ARC is the proper way to fund a pension. The combined contribution amount is over a billion dollars starting in 2021. The year over year increase in pension contributions from 2020 to 2021 is $284,785,000, an increase of nearly 35%. The property tax revenue can support that baseline amount of $824,000,000, but not the additional $284,785,000 required in 2021. This is why the success of the Chicago casino is so critical. It is important to gauge whether or not a Chicago casino will be adequate to cover the incremental funding required in 2021 and beyond to fund our pensions.
My quick analysis of whether a Chicago casino will be adequate to cover the increased ARC payments is as follows: As a revenue base of what the casino could bring in I use the Rivers Casino as a proxy for revenue per gambling seat. According to the Illinois Commission on Government Forecasting and Accountability, the Rivers Casino had $440.1M in Adjusted Gross Revenue (AGR) for FY2019. The Rivers Casino has 1,200 gambling positions, which calculates into an annual AGR per position of $366,750. Multiplying that by the 4,000 positions granted the City of Chicago in the enacting legislation, we have the Chicago casino generating a total AGR of $1,467,000,000. My analysis is quite different from the consultants that were hired by the City, they see an AGR of between $600,000,000 – $800,000,000. The consultants don’t believe a Chicago casino will generate as much revenue as my quick back of the envelope analysis does. There are a few reasons, I believe, for this discrepancy. First and foremost is the consultant’s view that there is a limited gambling market in Chicago and that a Chicago casino will cannibalize other nearby casinos. As one industry ‘expert’ testified during the hearings on the Casino Bill – “This casino legislation creates more gambling positions, not more gamblers.” I agree with the limited gambling market assessment, and if I was building a model for a client, I would incorporate a more detailed analysis for the impact of cannibalization in the market. But this simple model is to develop a general framework for firefighters and paramedics to understand the casino’s potential and risks facing our pension fund. It is important to understand that all these casinos are going to be fighting for a limited supply of gamblers, so I would say my figures are at the high end for a revenue estimate. A counter argument is that a Chicago casino, unlike the Rivers Casino, will be a destination casino. It isn’t hard to believe that people outside of Chicago, who would never think of coming here just to gamble, would come to our city, if Chicago had a casino anchored downtown. Chicago has so much to offer that it isn’t difficult to imagine the gambling market would expand to include out of state gamblers, gamblers making the trip to Chicago that they otherwise would not have.
If you have read my previous newsletters or heard the Lightfoot Administration’s concerns, there is a belief the overall tax rate is too onerous for a developer to take on the casino license. It remains to be seen how the taxing structure issue will resolve itself. It is important for the membership to recognize the possibility that the negotiations between the Lightfoot Administration, the Governor and Legislature may result in a reduced rate for Chicago’s share of the AGR in order to make the overall tax structure more palatable for a developer/operator.
I would prefer to see the State take less of the casino revenue and leave Chicago’s take intact for two reasons. The first reason is self-serving, as your pension fund trustee I want the most money as possible flowing from the casino into the pension fund. The second reason is my view of public policy and prudent expenditure of taxpayer’s money. The State has earmarked its share of the casino revenue to help fund a $45B State capital expenditure plan, a large portion going toward road construction. There is a belief amongst academia that road construction is a governmental expenditure that is highly susceptible to graft and corruption. I am not saying I am against road construction or capital expenditures, but with limited resources, casino revenue would be better spent chipping away at the City’s large pension legacy costs. The State, and particularly the Legislature, has shown it has not rectified its continued inability to self-regulate and prudently manage taxpayer money. Putting those arguments aside, the Chicago’s share of the AGR I used in my model is 33%, which is the rate currently enacted in the law. I also presented an analysis with a Chicago Casino tax rate of 25.5%. The logic in presenting two rates is an assumption that negotiations will reduce the overall tax rate on the casino operator by 15% and that reduction will be shared equally by the State and City. Is that what will happen? I have no idea, it is something we all should be concerned about.
Members, it is important that we monitor these developments and make certain that the revenue sources designated for our pension fund is not siphoned off for another purpose. We must remain vigilant to protect what we have worked for and what was promised when we joined the CFD. It is not enough to say the Illinois Constitution will save us, and it is irresponsible to think it is not incumbent on us to secure funding for our pensions. Politicians, both nationally and locally, have damaged one of the most stable revenue sources available to local governments – property taxes through home ownership. Home ownership not only is a sign of a stable middle class, it has been a reasonable taxing mechanism to support critical services like fire and police protection, EMS services, infrastructure maintenance and education.
Politicians, lacking prudence and self-control, continued to interject massive amounts of risk into the mortgage system, without taking into consideration the consequences to those that have already achieved homeownership. The result? Every aspect of the housing industry was negatively affected. These policy makers created an enormous risky housing bubble that nearly crippled the economy. They failed to regulate the industry and watched as Fannie and Freddie Mac securitized billions of dollars in risky mortgages and sold them off to unsuspecting institutional investors who thought they were buying investment grade debt instruments. The government also failed to regulate the companies that service the mortgages; I discovered this personally. When I moved back into the City when I was hired by the CFD I was able to put down $100,000 on my house to avoid paying private mortgage insurance. I made my mortgage payments each month and paid my property taxes twice a year as required. The company servicing my mortgage, Taylor Bean & Whitaker, suddenly, without notice, stopped taking mortgage payments. The company officials were found to have comingled client funds with operating funds and were very poorly managed with little oversight. The situation was so bad I received a phone call telling me my service provider went out of business and to send my mortgage payments to another mortgage servicer I have never heard of; not a notarized letter, but a phone call. Suspecting a scam, I refused without an accounting of my escrow account and written instructions. I was told, over the phone, they would file a foreclosure proceeding for non-payment, regardless of whether or not I was making payments to the old service provider. I couldn’t get anyone from the company that originally serviced my mortgage on the phone to confirm the change. Before any of this could be resolved the new service company did just that, they filed for foreclosure, even though my previous mortgage servicer stopped accepting payments. I literally had to go down to the county courthouse to straighten out the mess. Granted it didn’t hurt my credit score and the new mortgage service provider ended up being very accommodating, but the real issue is that even the most stable of organizations or industries can be susceptible to bad actors when good people are unwilling to speak up. Our pensions are no different. We can do everything right, play by the rules and pay into our pension each paycheck, but irresponsible stakeholders, unwilling to do their duty, will continue to interject unneeded risks into our pension fund.
I have stated before that our pension benefits are not expensive to the City and are in fact good public policy. But when stakeholders refuse to speak up when the pensions aren’t being prudently funded or administered, then the continued neglect eventually has to be accounted for, and that is the situation we find ourselves in now. Let’s not continue the mistakes of the past. Fraternally,
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.
