Pension fix: 28 percent water/sewer tax, phased in over 4 years

By Fran Spielman | Chicago Sun-Times

 

Mayor Rahm Emanuel will slap a new 28 percent tax on combined water-and-sewer bills, phased in over four years, to save Chicago’s largest city employee pension fund, aldermen were told Wednesday.

The plan is to start with a 7 percent increase, then increase it by 7 percentage points a year for three years.

 

It is expected to bring in $56 million in 2017 and $239 million by 2021, putting the Municipal Employee Pension Fund, with $18.6 billion in unfunded liabilities, on the road to financial health.

The Emanuel administration is convinced that Chicago’s sweeping home-rule power allows the mayor to impose the new utility tax without legislative approval.

Even with the increase, Emanuel said, Chicago’s water-and-sewer rate will be “comparatively lower” than 104 out of 126 suburbs. The increase will be 59 cents per 1,000 gallons of use in the first year and total $2.51 per 1,000 gallons by the fourth.

Last year, Emanuel persuaded a reluctant City Council to raised property taxes by $588 million for police and fire pensions and school construction.

Also, Emanuel imposed Chicago’s first-ever garbage collection fee of $9.50 a month.

Now, the combined water and sewer bill that homeowners pay — based on water usage, not on property value — will be getting even larger.

The average Chicago homeowner currently pays $686.04 a year for water and sewer services, according to Budget and Management spokesperson Molly Poppe.

 

A 7 percent utility tax on that amount would cost the average homeowner $48 the first year. The tax will not apply to the garbage fee, which also appears on the water bill.

Shortly after taking office, Emanuel doubled water rates over a four-year period — followed by annual increases to match the cost of living — to rebuild Chicago’s crumbling water and sewer system. That water bill has now become a catch-all for two other fees: the $9.50-a-month garbage fee and the proposed utility tax for pensions.

Ald. Ameya Pawar (47th) emerged from the briefing and told reporters that the new tax would cost the average homeowner $50 the first year and $200-a-year more by year four.

Pawar acknowledged a property tax increase would be less regressive — and also deductible on federal taxes, for those with a mortgage — but he reluctantly agreed to go along with the increase because the alternative is worse.

That would mean allowing the pension fund to go bankrupt and paying retirees their benefits on a pay-as-you go basis. That would take an additional $900 million to $1 billion per year.

“The alternative is catastrophic. We have to be able to pay for the liability that the city has accrued, and also mike good on the promises we have made, and also understand if we don’t bite the bullet today theres a much bigger problem in nine years.”

Pawar acknowledged that property taxes are, in many ways a fairer way to go. That’s because the utility tax is based on water usage, and water is needed to live, whereas property taxes are based on the value of your home.

“That’s a fair criticism,” he said. “But there’s a lot of reticence to go back to that well” after the largest property tax increase in city history, Pawar said.

He added, “We all know that these liabilities have sort of metastasized over the last 30 to 35 years. … We just have to do the right thing.”

Ald. Anthony Beale (9th), chairman of the City Council’s Transportation Committee, said the utility tax on water and sewer services is “being proposed” by the mayor, but it’s not “set in stone.” Aldermen are searching for alternatives that would not require lowering the boom on homeowners again.

“I’m actually making a proposal that, long-term, we look at putting a toll on all the expressways coming in and out of the city. If we looked at something like that, we coul actually repeal a lot of the taxes and fees we’ve put in place over the years. That much income could be generated,” Beale said.

But, Beale acknowledged that none of the short-term options are pretty. He agreed with Emanuel that a third property tax increase in one year would be even more painful than the new utility tax.

“We’ve hit the homeowners. We anticipate CTU and CPS hitting the homeowners to make their [teachers] pensions whole. You can only continue to go to the property tax so many times. You have to find other revenue sources in order to make these pensions systems whole,” Beale said.

He added, “We are in a pension crisis. You have to inch your way out of this. If we don’t, our ratings are gonna continue to plummet. We won’t be able to borrow money and, if we do, it’ll be at a much higher rate. So, we have to put this city on solid ground. Right now, it’s not on solid ground.”

Earlier this year, Emanuel cut a new deal to save the Laborers Pension fund, the smallest of the four funds, to replace an agreement struck down by the Il. Supreme Court.

It calls for employees hired after Jan. 1 to become eligible for retirement at age 65 in exchange for an 11.5 percent pension contribution. That’s three percentage points higher than employees pay now.

Veteran employees hired after Jan. 1, 2011 get to choose between contributing 11.5 percent for the right to retire at 65 or continuing to pay 8.5 percent and waiting until 67 to retire.

In exchange, Emanuel agreed to devote to a Laborers fund with just 8,000 members all of the revenue from a 56 percent telephone tax hike initially earmarked to save both pension funds.

That forced the mayor to find other new revenues to save the Municipal Employees Pension Fund, which has 71,000 members.

Union leaders whose members draw their retirement checks from the city’s largest pension fund have now agreed to those same changes. That makes Beale feel a little better.

“That’s one of the things we’ve been saying for a long time. If we’re gonna solve this pension crisis that we’re in, everybody has to sacrifice. Everybody has to put some skin in the game,” he said.

The new tax does not require legislative approval, but the employee concessions must be approve in Springfield. That’s why Wednesday’s briefings included a pair of state senators: Iris Martinez and Don Harmon.

Emanuel views the deal to save the city’s largest pension fund as the biggest piece of the financial puzzle he was elected to solve. The mayor is scheduled to outline the plan at a South Loop conference late Wednesday for bankers and individual investors.