In the 2021 Chicago budget approved last month, city budget documents attributed $43 million of a $93.9 million property tax increase to a “loss in collection” shortfall.
At a November presentation, city Budget Director Susie Park said that this was “the result of a lawsuit that the city lost.”
The lawsuit was brought in 2018 by one of the city’s four pension funds, which argued that the city wasn’t levying enough in property taxes to properly finance pensions. About a year after filing the suit, the pension fund won.
Money flows into the pension funds—police, fire, laborers, and other municipal employees—from two main sources: worker contributions and city revenues.
In 2016, the General Assembly established a specific annual amount that the city of Chicago must pay into the funds annually from 2016 to 2020. The amount increased each year. Then, starting in 2021, the city must pay into the funds based on a formula—which state law defines as “an annual amount sufficient to bring the total assets of [each fund] up to 90% of the total actuarial liabilities of [each fund] by the end of fiscal year 2055.”
After the law passed, the city and its pension funds began to view the law’s impact differently.
In 2016 and 2017, the city set its tax levy so that it would collect the required amount for pension funds—if all property taxes were paid in full and on time.
But that never happens. Each year, some taxpayers don’t pay their full bills, or they pay the taxes in subsequent years. The city calls this the “loss in collection.”
Pension fund managers saw the shortfall as opening a gap in pension funding—thereby jeopardizing long-term financing of pensions.
Taking just the firefighters’ pension fund as an example: Given its state-required annual contributions to the firefighters’ fund in 2016 ($199 million) and 2017 ($208 million), the city estimated the amount of taxes that would go unpaid. Then it contributed only the collected taxes plus the estimated amount of unpaid taxes. (Court documents show that these latter, estimated amounts were about $19.6 million in 2016 and $13.2 million in 2017.)
So, due to the loss in collection, the city’s actual contributions ended up less than the required contributions: $6.3 million less for 2017, and $6.8 million less for 2018.
During this time, the city adhered to a “make-up” practice: As late taxes were collected, the city paid those to the pension funds to make up for prior-year shortfalls.
The board of trustees of the firefighter’s pension fund, the Firemen’s Annuity and Benefit Fund of Chicago (FABF), voted to approve legal action against the city at its July 18, 2018 meeting, according to meeting minutes.
By law, FABF’s board must include the city’s comptroller, clerk, treasurer, and deputy fire commissioner. Meeting minutes show that City Clerk Anna Valencia and then-Comptroller Erin Keane were absent for the vote. Then-Treasurer Kurt Summers didn’t attend, while then-1st Deputy Fire Commissioner Richard Ford II voted in favor. (Ford now leads the Chicago Fire Department.)
FABF filed a formal complaint with the Cook County Circuit Court in September of 2018. FABF said in its lawsuit that state law required the city to pay the full amount it owes to each pension fund every year, regardless of how much was lost in collection.
The city argued the opposite. It didn’t have “an obligation to pay a certain amount each year to the funds,” said Weston Hanscom, a deputy corporation counsel with the city’s law department. Rather, “the city had an obligation each year . . . to make sure the funds were properly funded” as it saw fit. Hanscom said in an interview that this is “historically” how the city had done it.
The city defends the historic practice as a form of taxpayer protection.
Hanscom said that the city was averse to “overtaxing property owners in order to make sure you don’t have a shortfall.”
Complicating matters was that the 2016 revision to state law made a slew of additions and deletions to the existing pension code—so it’s subject to differing interpretations. “There were subsections left in the statute,” Hanscom said, that the city took “as having the option of handling this one issue in the way it had been” in the past.
When the city and FABF couldn’t concur on the statute’s interpretation, Hanscom said they eventually “kind of agreed to submit it to the court” to seek a declaratory judgment.
After FABF and the city traded over five dozen legal motions, Judge Sophia Hall decided for FABF in an October 2019 decision.
“The statutory scheme,” Hall wrote, “demonstrates that the legislature intended that the full amount of the stated contribution . . . would be paid by the City.”
Hall’s decision affects how the city makes contributions for all four of its pension funds. Its most visible impact was that Mayor Lori Lightfoot’s 2021 budget proposal included an increase to Chicago’s property tax levy of $43 million—which is what the city estimated it would need for its 2021 pension contributions to cover the loss in collection.
Staff of the Firemen’s Annuity and Benefit Fund did not respond to requests for comment.
A version of this piece appeared originally in The Daily Line.
