Illinois is facing a fiscal nightmare, Chicago’s outgoing mayor warns.
The more troubling that the fiscal situation in Illinois becomes, the less levelheaded local officials sound about facing up to their problems. That was evident last week, in the reaction that incoming governor Jay Pritzker and several Chicago mayoral candidates had to a speech by outgoing Chicago mayor Rahm Emanuel on the state’s deep pension problems.
Speaking before the city council, Emanuel, who will not seek reelection, warned that raising taxes alone won’t solve the city’s own pension troubles. Emanuel has run into opposition—in the courts and in Springfield—to his efforts to cut pensions costs, and he pointed out that the city has already raised taxes several times, including a huge property-tax increase in 2016, just to cover the growing pension costs. Chicago will need more new revenue as it faces sharply higher pension payments over the next two years, including $276 million in additional annual contributions just for the city’s public-safety retirement system. Emanuel urged the state to consider sweeping fixes, including changes to the state’s constitution, and he argued that the course favored by the Democratic Party’s increasingly powerful progressive wing—to solve the problem by taxing the wealthy—endangered prosperity. “You’re going to cut jobs doing that,” Emanuel said.
Those who will soon be in charge of trying to fix the mess jumped to dismiss Emanuel’s ideas. Oversimplifying the issue, state comptroller Susana Mendoza, a candidate for mayor, said, “We do not mess with people’s pensions,” adding, “End of story.” Former city hall insider Gery Chico, also running for mayor, somewhat naively suggested that one way to fix the problem is to “figure out how to do things better,” as if saving a few dollars here and there could possibly suffice. Former federal prosecutor Lori Lightfoot likened the movement to reform pensions to pulling “the rug out from under” city employees and retirees, while incoming governor Pritzker was equally simplistic in his dismissal of Emanuel’s ideas: “I believe when you’re promised something . . . you ought to get whatever you’ve been promised.”
The problem that Illinois faces, however, is that what constitutes a pension “promise” there goes beyond what courts elsewhere, including federal courts, have ever considered binding. In the private sector, where pensions are governed by the Employee Retirement Income Security Act, federal courts have consistently ruled that while workers are owed the pension money they’ve earned for work they’ve already done, employers may alter the rate at which workers earn new benefits. That’s generally true for many state public-sector pension systems, too.
In Illinois, however, local courts have interpreted pension protections in the state constitution to mean that government can never change the terms on which workers earn pension credits, even for work not yet performed. While the state or its municipalities can increase the benefits it promises to workers, once they do so they can never lower those benefits for those same workers, even if they are decades away from retirement. The result is that hundreds of thousands of state and local employees in Illinois have continued accruing expensive pension benefits, even as the state and its municipalities struggle to pay for the system. In the early 1990s, for instance, the state voted retirees automatic 3 percent annual cost-of-living increases, which can add as much as 20 percent to the pension system’s debt. Many states have subsequently eliminated or trimmed these annual increases, but in 2016 the Illinois Supreme Court overturned pension savings that Emanuel negotiated with many of the city’s unions, whose members were (rightly) worried about the system running out of money. The deal included having workers contribute more to their retirement accounts and reducing cost-of-living adjustments for retirees in exchange for commitments from the city to finance the deficit. Among the fixes that Emanuel proposed in his speech last week was a change to the state’s constitution that would allow Illinois governments to alter pensions in the same way other employers around the country do.
Illinois’ retirement system is among the worst-funded of government pensions, short some $151 billion in money to pay for retirement credits already earned, according to Fitch Ratings. But the state’s municipalities are also in deep trouble. A recent government report listed some 350 municipal police and fire pension systems that are less than 60 percent funded, out of a total of 656. Chicago’s system is in even worse shape, having only about a quarter of the money that it needs. Its debt totals $27 billion.
The burden is growing rapidly. Under 2011 legislation signed into law by then-governor Pat Quinn, municipalities must make their full contributions to pensions or risk garnishment. As debt has ballooned, required payments have soared. Chicago’s pension payments, $1.18 billion this year, will soar to more than $2 billion by 2022. The city of Rockford’s payments increased over the last decade from $7.9 million to $16.4 million. Struggling to keep up, nearly two-thirds of municipalities did not make their full public-safety pension contributions in 2016. When Harvey, a community of just 25,000 outside of Chicago with a high poverty rate, fell short by about $3.2 million in 2016 pension contributions, its firemen’s pension system demanded the funds, and the state comptroller seized them. Harvey responded by laying off some 40 workers.
Local taxpayers, not workers, bear much of the pension burden. An analysis earlier this year by the South Cook News of Harvey’s pensions, for instance, found that 42 retired firefighters contributed $1.14 million toward their retirement while they were working, but so far have collected $25 million in benefits. As a result, many Illinois municipalities are turning to tax increases and service cuts to pay pension bills—Chicago increased property taxes by $588 million in 2016—while others are laying off workers. Rockford has outsourced services and cut personnel sharply. “I could cut every staffer working at City Hall this year and still have a $3 million deficit,” Mayor Tom McNamara recently said.
Some officials have urged cities like Harvey to consider filing for municipal bankruptcy, which would give them the right to reduce their pension liabilities, but states can deny municipalities access to this option. In 2015, the Illinois legislature rejected a proposal by outgoing Governor Bruce Rauner that would have let local governments declare themselves insolvent.
Back in 2012, as Chicago and the state wrestled with its pension woes, Emanuel warned that unless Illinois found a way to cut the costs of its pensions, taxes could soar. “You won’t recruit a business, you won’t recruit a family to live here,” Emanuel said. In April, the Chicago Tribune published a series about outmigration of people and businesses from the state. Many were leaving because “they worried about rising taxes (with politicians threatening more to come), declining property values or other profound impacts on their lives”—precisely as Emanuel and others have worried about. Yet those who will soon have responsibility for dealing with the mess continue to minimize its impact.
Photo by Scott Olson/Getty Images
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