Chicago Park District ‘reform’ bill puts pension costs on taxpayers

Chicago Park District ‘reform’ bill puts pension costs on taxpayers

House Bill 417 falls far short of the structural reforms Illinois pension systems require. A constitutional amendment is needed after courts blocked a real reform effort in 2018.

Illinois lawmakers are trying to stop the Chicago Park District pension fund from becoming insolvent, but their solution mainly creates more debt and takes more taxes without fixing the real problem.

Lawmakers passed House Bill 417 and Gov. J.B. Pritzker is expected to sign it, giving the park district additional borrowing authority and the ability to raise property taxes in excess of usual statutory caps. While it does increase employee contributions for new hires, it includes no changes to benefits for current workers and retirees and lets workers retire two years earlier, falling far short of the structural benefit reforms needed to stabilize Illinois’ pension systems.

Pension debt is the No. 1 fiscal crisis facing Illinois. Illinois’ pension crisis is the nation’s worst. Illinois has a less than 40% funding ratio for its pension plans while the nation’s average is over 70% as of 2018. Pension debt estimates reached $317 billion in 2020 and the state pension systems consumed over 25% of all state revenues.

While those are the state’s pension issues, Chicago has big problems as well.

The current condition of the Chicago Park District pension system is dire, with over $800 million in unfunded liabilities and only a 30% funding ratio. In its current state, it will run out of funds in 2027. Significant reforms were successfully enacted in 2014, only to be struck down by the courts as unconstitutional because they made changes to existing pension benefits.

The 2014 reforms, passed in Public Act 98-0622, attempted to address the pension crisis by lowering annual cost-of-living adjustments to a more financially sound level and by increasing contributions by both employers and employees. The annual adjustments were set to be reduced from a 3% compounding rate that has far outpaced inflation and employer-employee contributions would have been brought to a more fiscally responsible rate. Before being declared unconstitutional, the 2014 reforms provided a model of the type of reforms Illinois pension systems need.

The new HB 417 does not include structural reforms. It is characterized as a lasting solution to the park district pension crisis, but does little to address it aside from increasing taxpayer funding requirements and authorizing more debt. The bill essentially shifts the entire burden of the Park District’s fiscal failures onto taxpayers and fails to change how benefits or employer and employee contributions are determined.

HB 417 includes provisions that are good and bad for the park pension’s future: increasing funding for the pension system, allowing more bond issuance by the park district pension, allowing property tax hikes in excess of statutory caps for debt service on that bonding authority, lowering the retirement age by two years and increasing employee pension contributions by 2% for new hires.

While reducing pension debt and raising the funding ratios of the systems are important goals, throwing money at the problem is not a sustainable long-term solution. Illinois’ pension issues stem from generous benefits that are unaffordable to taxpayers, the primary funding source for public pensions.

The bill allows for a total of $250 million in additional bond issuance. While proponents argue this is a good way to offer the pension system some leeway when there is a downturn in the market, it is dangerous to rely on bonds to fund other liabilities. Essentially, it becomes a gamble with taxpayers’ money, seeing whether the pension’s investments can return more than the interest on the bond, a strategy that has a history of failing.

While increasing employee contributions by 2% is an important and necessary step in reducing the financial strain on the pension system, it is hardly enough to stem the crisis. Additionally, it is partially offset by lowering the retirement age so workers are on the retirement plan an extra two years.

The pension problem cannot be solved simply by tweaking contributions for new hires and throwing more money at the funds. Without fundamental changes to how pension benefits are determined and how much money employees and employers put in, the services and resources residents rely on will be the next sacrifice.

Amending the state constitution to allow for changes to future benefit growth for current workers and retirees is key to creating a sustainable pension system that preserves other Chicago services. It would allow the types of changes courts declared unconstitutional from the 2014 reforms.

Structural reform does not need to include reductions in benefits already promised. Rather, it should mean keeping future benefit growth to sustainable levels. Pension reform should both end the pension crisis and keep promises made to public servants and retirees.

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