By: Ted Dabrowski and John Klingner
Illinois’ finances aren’t just decaying at the top, they’re falling apart everywhere. The state’s one-size-fits-all pension laws and overly generous benefits have left many cities suffocating under impossible pension debts as their populations shrink, tax burdens jump and resident incomes stagnate.
Without an amendment to the Illinois Constitution’s pension protection clause – and subsequent pension reforms – expect many cities to head toward insolvency.
The map below shows just how wide and deep the crisis is. Of the 630 downstate police and fire pension funds that reported data to the Illinois Department of Insurance in 2017, 57 percent had funded ratios lower than 60 percent. And nearly 100 funds had funded ratios below 40 percent.
What’s worse, the downstate pension decline has occurred during one of the nation’s longest-ever bull runs. If Illinois public safety pensions are doing this poorly in a great economy, imagine their struggles during an eventual downturn.
False, and true, solutions
Illinois cities – from Kankakee to Danville to Alton – need pension fixes before costs bankrupt them. And while state politicians have effectively quashed any chance for reforms now, that shouldn’t stop city officials from demanding real changes.
Real changes don’t mean pension fund consolidations or tax hikes. Consolidation may reduce administrative costs and increase investment returns, but it’ll do nothing to reduce the pension shortfalls. Not only that, but there’s the risk lawmakers will try to bail out cities by taking over or socializing all downstate pension debt.
Illinoisans should also beware the talk of a “statewide” solution for the pension crisis. For politicians, a statewide “solution” isn’t about passing reforms, it’s about taxing everyone in Illinois. Chicago Fed economists have already suggested enacting a statewide 1 percent property tax – on top of the nation’s highest rates Illinoisans already pay – to pay for the crisis.
The only solution that can protect both taxpayers and retirees is structural pension reform and bankruptcy for cities that aren’t yet too far gone. For others, like Harvey, Illinois, it’s probably too late.
Municipal leaders across Illinois need to demand the following if they want their cities to survive Illinois’ collective crisis:
- An amendment to the constitution so pensions can be reformed and worker retirement security saved;
- The ability to convert pensions to defined contribution plans for workers going forward;
- A freeze on COLAs (while protecting small pensioners) until pension plans return to health, and;
- Collective bargaining reforms so officials can hold the line on new contracts.
And if they get none of the above, they should demand from Springfield the option of invoking municipal bankruptcy. Otherwise, cities will remain trapped in a downward spiral – unable to reform and unable to reorganize.
Read more about Illinois’ downstate pension crisis: