Chicago, the state and the pension-law debate
Few options remain as Illinois governments confront budget-busting pension obligations.
Mayor Rahm Emanuel’s new city budget saw little opposition on Nov. 19 as it zipped through city council. It passed because it was an easy vote. It nickel-and-dimed the residents of Chicago with various fee and tax increases, it borrowed long-term to reduce current-year operating expenses, and it counted on pension reforms likely to be disallowed by the courts to cut costs. But, for the fourth year in a row, it left rates for property taxes, sales taxes and gas taxes unchanged.
It also ignored the looming $500 million increase in pension contributions the city will have to pay next year. City politicians kicked the can a little further down the path, at least beyond the next election, and gave themselves time to convince the state to help them with their fiscal woes.
Meanwhile, in Springfield, Governor-elect Bruce Rauner visited with Gov. Pat Quinn and the legislative leaders to better understand, among other things, the magnitude of the state fiscal crisis he will face as he takes the reins in January. He later described the state’s financial condition as “horrible,” “stunningly bad” and “dire.” The current state budget raises rather than reduces a bill backlog counted in billions and relies on short-term borrowing that will have to be paid back next year. Quinn claims the budget is still insufficient to pay for hundreds of millions in essential operating expenses. One can only guess what other surprises lurk in the budget detail.
Keep in mind, all this ignores the additional $3 billion hole arising next fiscal year from the drop in revenues due to reduced income-tax rates taking effect in January.
A third event took place in Springfield on Nov. 21 that directly impacted the city and state’s budget woes. Judge John Belz of the Sangamon County Circuit Court declared that public employees who participate in Illinois’ public retirement systems are constitutionally protected from government action that diminishes their promised pension benefits. Most observers believe the Illinois Supreme Court will soon confirm this opinion.
State leaders in Springfield and city leaders in Chicago have been counting on pension reform as part of the solution to their overwhelming budget challenges. With the judge’s decision, lawmakers now have one hand tied behind their backs as they wrestle with ever-growing pension costs and try to manage the shrinking percentage of their budgets available for current operating costs. Neither Chicago nor Springfield can effectively address budget challenges without somehow addressing pension costs.
Court decisions are not without unintended consequences, and there is at least one consequence of Judge Belz’s opinion that could prove painful to public employees. The opinion seems to leave government leaders only one way to control pension costs: reduce government payrolls.
Payroll reduction could take the form of an actual dramatic reduction in the size and scope of government. This would be the most beneficial long-term reform. It would require state and city governments to prioritize and focus on key programs and services, and would save taxpayers the expense of funding nonessential programs, all while serving to reduce pension costs.
Privatizing services currently performed by public employees could be another form of payroll reduction. That’s how the village of North Riverside is handling its pension crisis. The village plans to move its entire fire department to a private provider of fire protection services. While this option does not reduce the scope of government services, it does reduce the public payroll and participation in the public retirement systems. And it can still result in substantial savings not only for pension costs, but in ongoing operating costs of government as well.
One more payroll reduction option is to simply reduce salary levels for public employees. Pension benefits are constitutionally protected, but compensation levels are not. The state will enter collective bargaining with AFSCME next year. If state officials want to affect a reduction in pension benefits, they can’t do it directly, but they can do it by reducing the compensation levels on which the benefits are based.
Perhaps these options sound draconian to a public employee or retiree. In fact, compared to modest pension reforms that place reasonable limits on the growth of retirement benefits, they are. But, as an unintended consequence of the law, and the court’s application of the law, these are the few options left for Illinois politicians to consider as they confront budget-busting pension obligations.