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Analysis: No answers for Chicago's pension ills as mayor prepares budget

By David Greising and Karen Pierog

CHICAGO (Reuters) - When Mayor Rahm Emanuel delivers Chicago's 2014 budget address on Wednesday, he will lay out plans for tackling a $340 million deficit, but a bigger problem barreling down on the city will have to wait - a state-mandated jump of about $600 million in pension payments starting in 2015.

During 2 -1/2 years in office, Emanuel has slashed a deficit that stood at $635 million. He has cut jobs and costs. But on the city's pension problems, which are a municipal woe that compounds Illinois' statewide morass, he has made virtually no progress.

Unwilling to hike property taxes and unable to find another major source of revenue, Emanuel and the city may have to resort to finding a way to push back the payment deadline or engage in a fight with unions to cut benefits.

Chicago must make the balloon-style payment to its police and fire unions, the first year of a new pension spending arrangement, to comply with a 2010 Illinois law mandating actuarially required contributions. Statewide pension reform could relieve the city of this obligation, but with reform stalled in the Illinois legislature and Emanuel's efforts coming up short, the city is beginning to reckon with the possibility that its pension payments through 2020 could average $1.162 billion a year, up 147 percent from the average over the last five years.

"We're all thinking out to 2015," an administration official said. "It's on our mind. We talk about it all the time. It's very real for us."

Illinois has the worst-funded state pension fund in the United States and Chicago, the biggest city, is suffering some of the consequences. Its own credit rating has taken a significant hit, and the city has limited power to change major pension costs such as retiree cost of living increases.

A persistent impasse on state pension reform was among factors leading Moody's Investors Service in July to issue a rare triple-downgrade of Chicago's debt rating, down three notches and closer to the low end of investment grade.

Emanuel's options are limited. He has tried revenue raising measures, such as an abortive effort to privatize Chicago's Midway airport, and cost cuts, such as redesigning Chicago's garbage collection system. He even persuaded leaders of the police sergeants' union to accept pension cuts, a plan soundly voted down by rank-and-file members.

COMPARISONS WITH DETROIT

As Emanuel put together the 2014 budget in recent weeks, though, there was no pension fix in sight, and the $338.7 million operating budget deficit demanded immediate attention. "This year's budget is more focused on addressing this year's budget problem," the administration official said.

Chicago's pension and fiscal issues are such that bond analysts, civic watchdogs and media frequently draw comparisons to Detroit, which filed for bankruptcy in July.

Such comparisons may be strained, because Chicago has strengths that Detroit lacked. Though Chicago lost 200,000 residents during the first decade of the 21st century, an incremental increase in population started in 2011, according to U.S. Census Bureau data. While violent crime in certain neighborhoods is a scourge Emanuel has not eradicated, citywide crime incidents have declined. Chicago's central business district is thriving, due in part to a flourishing tech scene and success in luring large corporate headquarters.

Even so, those who follow Chicago's finances stand by their comparisons with the Motor City.

Chicago's operating budget deficit, projected at $338.7 million for 2014 on $3.02 billion in revenue, could grow to $995 million in 2015 and $1.15 billion in 2016 without pension reform, or roughly one-third of the city's revenue, according to data the mayor's office published in July.

The Moody's downgrade in July brought Chicago's rating to A3, and Standard & Poor's and Fitch Ratings both said Chicago is vulnerable to new downgrades.

"The same bad decision making and failure to recognize the long-term implications of short-term, politically attractive decisions can lead Chicago down the same road that Detroit took over the last two decades," said Laurence Msall, president of the Civic Federation, a government finance watchdog group. "There are plenty of opportunities for the city to get off that road, but it requires cooperation from the state of Illinois."

EMANUEL MAY RECEIVE HELP

Leaders in the state legislature say they believe they can pass major pension reform before Emanuel actually would need to make the $600 million balloon-style payment in 2015.

Help may be on the way for Emanuel, if fellow Democrat state Senate President John Cullerton can get his way. Cullerton said he is working with Emanuel on legislation that would relieve the city of its obligation to make the big 2015 payment.

Cullerton on May 28 quietly introduced a bill in the Illinois Legislature designed to give Chicago breathing room in delivering the big make-up payments to its police and fire funds by gradually ramping up the city's contributions. The point, Cullerton said, was to pressure the unions to make concessions.

"For the police and fire fighters who just think they're going to not do anything and next year the city all of a sudden is going to pay into their pension system a whole bunch of money, I think that bill sends a message it ain't going to happen like that," Cullerton said. "They better do a deal or we'll impose a reduction in benefits."

The police and fire unions are girding for battle. "We have to fight this. We have no choice," said Michael Shields, president of the Fraternal Order of Police, the city's police union. "We can't do nothing and watch the pension fund explode."

Emanuel visited the Illinois state capital, Springfield, in May 2012, but has not returned since. Even so, Cullerton said, he has actively lobbied for pension reform.

"I can't fault him at all for his efforts to identify this as a major problem and try to have us resolve it," Cullerton said.

(Editing by Peter Henderson and Grant McCool)

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