April 1, 2014

Chicago Pension Deal - $500M Error, massive Tax hike

April 1, 2014. Chicago. Is it an April Fools joke? Chicago homeowners surely hope it is. And the city’s media is struggling to decide what the lead headline really is - City reaches Pension Deal or City Hall caught lying about property tax increase. If you’re a Wall Street investor or a government employee, you should be celebrating. If you’re a homeowner or business owner, you’re probably plotting your immediate escape from the city.

The teachers union called Mayor Emanuel's pension deal a "heist". But homeowners are the ones feeling robbed. Image courtesy of ChicagoNow.com.

In a tentative agreement announced yesterday by City Hall, the city and 30 unions have apparently reached a deal that would fix Chicago’s worst-in-the-nation pension disaster and satisfy Constitutional concerns by not touching past or current government employees. The changes will only affect future contracts and new hires.

What Chicago taxpayers get

The teachers union is calling the announced deal a “heist” and Crain’s Chicago Business actually caught the city lying about the massive pending property tax increase Mayor Emanuel has agreed to. Their headline proclaimed, ‘Emanuel’s Pension Deal would cost Taxpayers much more than Advertised’. How much more? $500 million more in higher property taxes than City Hall spokespeople insisted last night, but this morning now concede is correct.

Based on the agreement outlined by City Hall, Chicago citizens get to avoid hikes in user fees or sales taxes to pay for the city’s golden government employee pension funds. Chicago businesses and homeowners on the other hand, get a $750 million property tax hike over the next five years. Mayor Emanuel’s staff originally insisted it was only a $250 million tax increase, which is what was reported throughout the city and the nation, but today agreed the higher amount is actually correct.

According to 2010 Chicago census numbers, there are 1,194,337 dwellings in the city of Chicago. There are also 255,502 businesses in the city. But the vast majority of those are really small, home-based businesses with no employees and little profits. And many large corporations or retail chains have deals exempting them from property taxes or they lease the buildings their stores or restaurants occupy.

What the unions get

To avoid a union challenge in court, the agreement doesn’t touch past or existing union contracts or the employees and retirees benefitting from their generous terms. Instead, the pension fix comes at the expense of Chicago homeowners. The most eye-catching ‘concession’ the unions would make is forcing their members to retire and start receiving cash payments earlier, at age 65 instead of age 67, the same as Social Security. That higher age is a recent reform with current and past retirees allowed to retire as early as age 50.

The other concession half the city’s employee unions have apparently agreed to is an increase in the amount each government employee must contribute to their own pension. In the real world, under 401k plans, workers pay 100% of their own retirement funds. If they’re lucky, they may work for one of the few companies left out there that will match employee retirement contributions up to a small level like 5%. The agreement announced by City Hall last night would increase the amount government employees must contribute to fund their own pensions from 8.5% of their pay to 11%.

Even still, that math is misleading. The 8.5 and 11 percent reflect the amount of their paycheck they will contribute, not the percentage of the pension payments they’ll receive. Government employee pension payments are based on the person’s final, highest pay rate, not an average over their 20 or 30 year employment. So while union members are contributing 8.5% of their pay, they will not have funded anywhere near 8.5% of the benefit checks they’re receiving, which are based on the person’s pay rate at retirement and are typically six-figure yearly checks for life.

Another concession the unions would make is to only accept an automatic 3% yearly raise based on their original hired salary, not compounded and based on their current salary each year. Historically, that would seem more than fair, if not stingy on the party of the city. But for the majority of American workers who’ve seen nothing but pay cuts over the past decade, that doesn’t seem like much of a concession.

The report from Crain’s Chicago Business calculates that the burden of Mayor Emanuel’s grand bargain will be split, with home and business owners taking on 70% of the burden and government employees taking on 30%. But from the eyes of a typical Chicago home or business owner, forcing government employees to contribute $6,000 more over their lifetime to a golden pension plan that will often pay them millions, isn’t much of a pension fix. And of course, it looks like nothing was done about all the double and triple-dippers or the ‘teachers’ collecting millions in pension money for working only one day in their life. Yep, the fix is in alright, but it’s not a pension fix.


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