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April 7, 2014

The $250 million annual property tax increase that Mayor Rahm Emanuel wants to shore up two of Chicago's dangerously underfunded pension funds could almost double if he reaches similar deals to restructure other equally troubled retirement plans, according to a Crain's estimate.

Mr. Emanuel's proposal for the plans covering municipal workers and laborers restructures about half of the city's $19.5 billion unfunded pension liabilities, with police and fire funds accounting for the rest. If he reaches deals to overhaul those funds similar to the March 31 proposal, and funds the city's share the same way, property taxes could increase another $200 million or more, according to Crain's rough calculations. Meanwhile, a crisis of about the same magnitude is looming over the Chicago Board of Education.

Uncertainty about the total cost to stabilize Chicago's woefully underfunded pension plans has troubled some members of the Illinois General Assembly, which on April 3 delayed a vote on the pension deal. It also is starting to worry downtown office building owners and their tenants, who would feel the brunt of the tax increases.

“If you had one situation to deal with, you take the pain and it goes away,” says Robert Six, chief operating officer of Chicago-based Zeller Realty Group, which owns the Wrigley Building and other landmark office high-rises in Chicago. “But the light you see behind this one is another freight train coming at you, not the end of the tunnel.”

The property tax payments probably needed to stabilize the police and fire funds are steep but far less than the approximately $600 million total increase in contributions required next year by state law as a step toward full funding, which the mayor has said is unacceptable.

Mr. Emanuel has not reached an agreement with the police and fire unions to restructure pension benefits and declines to discuss the potential cost of any scenarios. He often has said that any deal will take both reforms and revenues.

But the principles laid out in the city's reform package provide at least some guidance. The municipal plan addressed the shortfall by having employees pick up 30 percent of the cost, with the city picking up the larger portion, half of which would be covered by a property tax increase. Budget savings and shifting some pension expense to separate sewer and airport budgets would pay the other half.

Applying those percentages to the $600 million would mean annual required contributions of $420 million, with half of that paid by annual property tax increases of $210 million; if phased in over five years, the increase would be about $42 million a year.

However, police and fire pensions already have less generous inflation adjustments and higher employee contribution levels than municipal workers and laborers have, making concessions more difficult.

If, for example, the city had to pick up 85 percent of the cost, instead of 70 percent, it would take $255 million to cover half of the increased contributions with a tax increase.

“In lieu of an actuarial analysis, it does give some idea of the long-term costs,” says Amanda Kass, budget director and pension specialist at the Center for Tax and Budget Accountability, a fiscal think tank in Chicago.

Crain's calculation doesn't include any tax hike for a $696 million contribution the Board of Education must make in the next fiscal year to its teachers' retirement plan, which has a separate $9.6 billion unfunded liability in addition to the city's pension debt. The board must drain its reserves to make a $613 million payment in the current fiscal year, which ends June 30, sharply higher than last year's $196 million payment.

Mr. Emanuel's proposal for the city workers and laborers calls for increasing taxes by $50 million a year until the increase reaches $250 million, for a cumulative five-year increase of $750 million.

Nearly 200 downtown Chicago skyscrapers would shoulder almost $140 million of that increase, according to a study by the Building Owners and Management Association of Chicago, which supports Mr. Emanuel's plan.

Leases vary, but taxes are usually passed on to tenants, leaving building owners to absorb the tax on vacant space, which was about 13.4 percent of the market in late 2013, according to Chicago-based U.S. Equities Realty LLC.

Commercial properties in Chicago are assessed at 2.5 times the residential rate, resulting in a commercial property tax rate second only to Detroit, according to the Minnesota Center for Fiscal Excellence, while Chicago homeowners pay the 18th-highest property taxes among the 50 largest cities.

“Our biggest concern is not being told what's coming,” says Michael Cornicelli, executive vice president of BOMA Chicago. “Nobody knows.”

Source: Crain's Chicago Business