Chicago Pursues Deal to Change Pension Funding

The hard-fought passage here Tuesday of a landmark bill trimming retirement benefits for state workers, aimed at fixing the vastly underfunded pension system, has become instantly relevant to the nation’s third-largest city, which has its own pension systems in various stages of financial collapse.

And if anything, the reckoning in Chicago is even nearer and more difficult than the one the state had faced, putting its Democratic mayor, Rahm Emanuel, in a difficult position under a tight deadline.

Under state law, the city must increase its contributions to its workers’ pension funds by $590 million in 2015, to a total annual contribution of $1.4 billion for current and future retirees. If no pension deal can be reached by November of next year, when the city will draft its next budget, the city will either have to raise taxes or cut services or some combination of both.

But city officials are hoping there is now momentum on their side to force a compromise solution. They come armed not only with Tuesday’s state vote but also with a federal judge’s ruling, also on Tuesday, to formally send Detroit into bankruptcy. Chicago is not facing bankruptcy, but the Detroit case produced a development being watched closely by cities and unions across the country: It explicitly permitted changes to public pension funds to help the city shed its debts and reorganize.

“Should Chicago fail to get pension relief soon, we will be faced with a 2015 budget that will either double city property taxes or eliminate the vital services that people rely on,” Mr. Emanuel said in an email on Wednesday. “To avoid that, we need a balanced approach. We need a plan that is fair to both workers and taxpayers, and gives them both the certainty and security they are looking for.”

Pension changes must be part of the calculus, he said.

“Without reform and revenue, we cannot make the critical investments in our future — and the future of our children and neighborhoods,” the mayor wrote. “Without reform and revenue, we cannot be the city that we want to be.”

One credit rating agency, Fitch Ratings, estimated that if there is no deal to reduce pension benefits for city workers and no cuts in services, the city will have to increase property taxes by 35 percent.

Actually, the situation is even worse, said Laurence Msall, president of the Civic Federation, a government watchdog group. The Fitch study looked only at police and firefighter pensions. If you include pensions for teachers, laborers and other municipal employees, property taxes in that situation would have to more than double, he said.

Angry union officials say they will file suit in state court in coming days to have the new state law overturned, a process that could last more than a year, and they argue that no further deals involving the more than 62,000 Chicago workers should be enacted until that litigation plays out. City officials say they cannot wait that long.

“There’s a definite hole in the budget, and neither taxpayers or employees should be expected to fill it alone,” said Kelley Quinn, a spokeswoman for the mayor. “The longer we delay, the worse the problem gets.”

Union leaders are not in such a rush.

“There certainly seems to be a will to address Chicago’s pensions, and obviously the mayor is pushing that vigorously,” said Daniel J. Montgomery, president of the Illinois Federation of Teachers. “But if they are looking to duplicate what they did to the state systems, they’ve got a few legal hurdles.”

For one thing, he said, the Illinois Constitution has “very clear and precise language” that guarantees that retirement benefits cannot be lowered. The ruling on Tuesday by the judge overseeing Detroit’s bankruptcy that federal law trumps the Michigan Constitution when it comes to lowering benefits does not apply in Illinois, Mr. Montgomery said.

“The City of Chicago is not bankrupt,” he said. “It is an entirely different situation.”

Michael K. Shields, president of Chicago’s Fraternal Order of Police, said there was no way to compare the new state bill with the situation faced by his members. “This pension bill is not one size fits all,” he said.

He pointed out that much of the benefit cuts in the state law came from changes in the way annual cost-of-living raises are dispensed. While state workers received annual raises of 3 percent that compounded every year, Chicago police officers and firefighters receive a flat 3 percent raise that does not compound. So more benefit cuts would have to be found elsewhere for those city workers.

Other union leaders were even more blunt.