Illinois cities take on more debt to cope with pensions
Pension deficits are causing communities to consider more borrowing – and gambling with the proceeds – as pensions continue to consume bigger shares of budgets.
Illinois municipalities are fighting $75 billion in pension debt, forcing mayors to consider gambling to pay for pensions – in more ways than one.
Chicago is turning to actual gambling, looking to dedicate casino revenue to its police and fire pension debt. Kankakee and other municipalities are trying a different form of gambling: pension obligation bonds.
Kankakee faces $109 million in pension debt owed to its police and firefighters. The funds have about one-fourth or less of what has been promised to retirees.
City leaders are considering borrowing: selling 20-year pension obligation bonds. They hope to get the money at a low interest rate and make a gamble that they can invest it and earn a higher rate.
Trouble is, taxpayers usually lose that gamble, the Government Finance Officers’ Association points out. Pension obligation bonds place taxpayer money at risk and often leave governments with more debt rather than less because they often fail to earn a high enough return.
Illinois state leaders set an example for cities by readily risking taxpayers’ money: Illinois holds 30% of the entire nation’s pension bond debt. The more unconventional debt, the more you know a government is in trouble.
Kankakee’s taxpayers will still feel pain from the bond plan, with a 2% sales tax and increased property taxes also being discussed to pay back the pension bonds. And Kankakee is not alone in the pension obligation bond gamble.
The Bradley Village Board in February 2021 approved selling $11.8 million in pension obligation bonds to help deal with their $10.5 million of unfunded public safety debt. Skokie recently borrowed $176 million to help pay for “unsustainable” pension promises. Wheaton, Berwyn, Moline and East Moline all recently used borrowing to pay for pensions. Chicago, too, has considered issuing pension bonds to help pay down its debts.
These bond programs are a stopgap measure to prevent cities’ finances from collapsing under pension burdens. Even if the bonds are not used, municipalities still face pressure to find money from more traditional sources: taxpayers.
Niles recently proposed an 88% increase to its property tax levy in part because of rising pension costs. Decatur recently approved a property tax increase for paying police and fire pensions and paying off bonded debt. River Forest also increased property taxes this year to help pay its police and fire pension obligations, which consume over 40% of the city’s property tax levy. Elmhurst is exploring a range of potential tax increases to cover infrastructure debts.
But there is a better way than more debt and higher taxes.
State lawmakers can give cities the tools to control future growth of pension obligations and hack away at that $75 billion debt. They can give themselves the ability to fix the state’s $317 billion debt to its five statewide pension systems.
To take that control, lawmakers must let people vote on an amendment to the Illinois Constitution that allows future pension growth to be curbed.
Pension debts are a key driver of the state’s property taxes, which consistently rank among the highest in the nation. While the pension systems of the state of Illinois and city of Chicago often make headlines for their lack of funding, local governments throughout the state are in similarly bad condition.
Many jurisdictions are nowhere near being able to pay their pension obligations. But state lawmakers have not allowed lack of money to stop them from actively floating and approving pension expansions, including a successful $850-million expansion for firefighter cost-of-living adjustments in Chicago that lawmakers then considered expanding to city police at a cost of $3 billion. The police expansion stalled.
Illinoisians already pay some of the highest taxes in the nation, largely to pay for pension debts, so the Kankakee plan including tax increases is nothing new.
Illinois leaders can take action on sustainable pension reform today. The constitutional amendment, paired with the Illinois Policy Institute’s hold-harmless pension plan, could save Illinois roughly $2.4 billion in the first year and more than $50 billion through 2045. The plan would also fully fund the five pension systems, erasing that $317 billion debt and allowing the state to get back to providing the services taxpayers expect.
Plus it would let local governments stop taking risks with taxpayer dollars and constantly raising the property taxes that are pushing Illinoisans to move to other states.