Bonds

Chicago Mayor Brandon Johnson won’t say yet whether he intends to leave in place his predecessor’s executive order earmarking a budget surplus for future supplemental pension contributions.  

He also hasn’t committed to which of the tax proposals he advocated the campaign that brought him to the mayor’s office this month he will pursue first.

The municipal market is following both issues closely as signs of the fiscal trajectory Johnson will take the city in and his commitment to maintaining the city’s positive budget momentum while managing downtown’s recovery from COVID-19, public safety struggles, and staking out his investment priorities.

“We have not made a decision,” Johnson, who took office May 15, said Wednesday in response to a question on former Mayor Lori Lightfoot’s executive orders that was posed during the traditional mayoral news conference that follows City Council meetings.

On her way out, Lightfoot signed a series of executive orders including one that establishes a pension advance fund and authorizes the city to assign a projected $642 million 2022 and 2023 budget surplus to cover supplemental pension contributions for 2024, 2025, and 2026.

“With this Executive Order, we are solidifying that legacy to help ensure pension stability for City workers and put Chicago on a strong financial path forward,” Lightfoot said in the directive. The order ensures “that this advance payment is funded through 2026 and serves as a one-time bridge to when the City expects to receive casino revenues to support pension payments.”

A top Johnson advisor said the administration is still waiting on the advice of the incoming Chief Financial Officer Jill Jaworski and budget director Annette Guzman, who both start June 1, on the impact of the executive order on the city’s flexibility to manage its budget and spending priorities.

“We are waiting on them to get their feet on the ground to really get in depth on what those executive orders mean for the 2024 budget and what options we have,” Johnson senior advisor Jason Lee said in an interview this week. “From a values perspective, one, the mayor is wholeheartedly committed to protecting retirement security… and two, he’s 100% committed to being a good fiscal steward for the residents and taxpayers of Chicago.”

That means “both making sure we are not overburdening our residents with property taxes, fines, and fees and other regressive forms of revenues, and two, that we are making investments in things that Chicagoans have told us they want which are safe communities, safe and reliable public transportation, affordable housing, etc. so we have to balance all of those priorities and we have to do it in a responsible way and we want as much flexibility to do that while still again being responsible,” Lee said.

“We will look at that and our team will assess what kind of constraints that does or doesn’t put and whether that’s helpful to meet our priorities,” Lee said of the executive order.

If Johnson does end up canceling the pension order, Lee said it shouldn’t be taken as a lack of support for the supplemental pension policy — those decisions lay ahead with the input of Jaworski and Guzman.

The city established an advance funding policy with the 2023 budget that calls for a supplemental contribution — $242 million this year — that is sufficient to stave off growth in the unfunded liabilities and ovoid the need to sell off assets to meet annuitant obligations in a bad investment year.

The action along with movement toward structural budget balance, drove a series of positive rating actions most notably from Moody’s Investors Service which in November lifted the city’s rating out from junk territory.

After ramping up payments in recent years, all four pension funds are receiving an actuarially “calculated” contribution aimed at reaching a 90% funded ratio beginning in 2055, but it still falls short of the “actuarially determined contribution” recommended by actuaries.

Even with a supplemental contribution in the $200 million range next year, the city would still fall $330 million short of funding the ADC, according to the city’s mid-year fiscal forecast.

The city’s statutory payment rises from $2.4 billion this year to $2.7 billion in 2028. The city has $33.7 billion of net pension liabilities with the funded ratios of its four pension funds ranging from 21% to 46%, for an average of 23%, the lowest among major cities.

On another front, the city could prevail in the waning days of the state’s legislative session on in its request to delay until the fall veto session passage of bills that raise the benefits for Chicago firefighters who started after 2010 when a tier two was established. Former city CFO Jennie Huang Bennett warned earlier this month the changes carry a long term price tag of $3 billion.

Backers argue the changes were promised to Chicago police and firefighter funds when the state consolidated suburban and downstate pension funds and provided the same changes.

Sponsors say they are also needed as part of a “fix” to avoid running afoul of Social Security’s rules that require public pensions at least match what an employee would receive if they paid into Social Security.

Sources said the Johnson administration asked that the bills’ passage be delayed until the fall veto session to give the city time to consider how to absorb the costs. A delay also provides more time for a more sweeping discussion over the summer on a statewide Tier 2 fix and other pension funding matters to take place.

Lee declined to comment on negotiations but said, again, it’s about balance.

“There is an understanding and willingness to look at this and make sure that whatever we do we are meeting our responsibility to people who have worked on the front lines and we are doing so in a way that gives confidence and comfort to the taxpayers that they can sustainably bear this cost,” Lee said.

A separate bill is pending for Chicago’s police fund that makes permanent a cost-of-living adjustment lawmakers previously approved every few years. Over Lightfoot’s objections, Gov. J.B. Pritzker signed legislation in 2021 that did the same for the firefighters.

That enhancement for Chicago firefighters adds $180 million to the fund’s existing unfunded liabilities and $16 million to $17 million in additional annual costs that add up to $700 million by 2055, according to a review from Segal. That too is expected to be held.

Taxes
During the campaign, Johnson laid out a fiscal blueprint that called for raising $800 million in new revenue by implementing a surcharge on suburbanites traveling into the city for work, reinstating the head tax on employees of large companies in some cases, imposing a jet fuel tax, raising the real estate transfer tax, and raising the hotel tax. Johnson also wants to impose a transaction tax on securities trades.

Johnson has since dropped the commuter tax from his agenda and federal approval is unlikely for the jet fuel tax. Gov. J.B. Pritzker shot down the transaction tax, which would need state approval to enact, earlier this month over worries that the city’s commodities and derivatives exchanges would relocate. CME Group Inc. Chief Executive Officer Terry Duffy last week reiterated that warning.  

Johnson said his tax plan, along with management efficiencies totaling $2 billion, would eliminate the city’s structural deficit and allow for new investments without raising property taxes. Johnson also wants to cancel Lightfoot’s shift last year that allows for an automatic property tax increase tied to inflation. The city skipped the automatic trigger in the 2023 budget due to buoyant tax collections.

Asked what tax proposals were on the front burner, Johnson did not commit Wednesday. “Our conversations are really about what our needs are. I think it’s important to start there,” he said.

The city operates on a  $16.4 billion all-funds spending package including a $5.4 billion corporate fund and holds sway over a number of sister agencies.

Lee elaborated on the administration’s thinking. The administration put the package on the table from its “vantage point” during the campaign and wants business and other stakeholders to now weigh in.

“For ideas that you have particular concerns about….bring your ideas,” Lee said.

With the state legislative session slated to end in the coming days, Lee said the city will likely refine its plans and potential requests of lawmakers in the coming months and return in either the fall veto session or the 2024 session for legislative changes needed.

“Maybe the package looks very different,” he said. “We want to be very judicious and thoughtful.”

Johnson prevailed during his first council meeting in winning approval for his committee leadership structure, which should give him the edge in pursuing his agenda.

It came after the council had attempted to strike a more independent note by passing its own reorganization in March. Alderperson Pat Dowell, who had previously chaired the budget committee, takes over the finance committee.

City crime also weighs on the market’s sentiments and on Thursday Johnson stood beside other city and police officials and community leaders to lay out Memorial Day weekend activities and efforts to curb violence that typically is more pronounced during summer holidays. Johnson announced a $2.5 million investment to fund violence prevention and youth outreach efforts across the city by funding the work of 253 grassroots organizations.

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