Illinois’ Gordian knot: Pensions, insolvency and the ‘b word’

Illinois’ Gordian knot: Pensions, insolvency and the ‘b word’

If lawmakers continue to balk at building the tools necessary to reform pensions, bankruptcy will be the only way out for communities across the state.

As the legend goes, Alexander the Great was called to solve a puzzle.

An oracle had declared that he who unwound a spectacular knot, one made with a yoke of an old wagon in the city of Gordium, would rule all of Asia. Coming upon the knot, Alexander struggled to untangle the mess. Instead, he drew his sword and sliced through it with a single stroke. He would go on to conquer one of the greatest empires in world history.

The Illinois city of Harvey – population 25,000 – is stuck in something of a Gordian knot. Harvey hit headlines in April when a state-backed diversion of its revenue to pay for pensions forced the city to lay off about 40 public safety personnel.

Harvey’s pension debt is more than three times its annual operating revenue, but the state constitution does not allow for a reduction in current or even unearned future retirement benefits.

What about raising taxes? Harvey’s tax base is shrinking and its local effective property tax rates already are among the highest in the state.

What about borrowing? Because of mayoral malfeasance, the city is iced out of the bond market.

What about restructuring? Illinois does not generally authorize municipalities to file for federal bankruptcy protection.

What about a state bailout? This may alleviate Harvey’s problem, but should be off the table given Illinois’ record-breaking pension debt of its own.

With limited tools to cut costs, raise revenue or borrow money, Harvey’s knot is tightly bound. It is drowning. And it is not alone.

Nearly 200 downstate police and fire pension systems are less than 50 percent funded. Many of those areas are shrinking in population as well, with residents and businesses already facing a high tax burden.

The city of Peoria, which saw its population drop more severely than any of the 50 largest cities in Illinois from 2016-2017, announced this week that it was sending layoff notices to more than two dozen employees. The city’s own budget documents warn “the growth in pension obligations is crowding out the use of property taxes for operations,” and that come 2019, 100 percent of its property tax dollars will be diverted from operations to pension payments.

Untangling these knots requires sober analysis that isn’t happening among legislative leaders in Springfield or on the campaign trails. It is an urgent problem, because the last resort – the sword of bankruptcy – is not pretty. But given the alternative is the utter chaos of insolvency, it could be the only path available to places such as Harvey.

Other communities across the country have dealt with these knots before. Illinoisans might not know it, but a small city on the Atlantic Ocean might be a vision of what’s to come for distressed municipalities in the Prairie State.

Central Falls, Rhode Island, is very similar to Harvey. With 19,000 residents, it is a lower-income city a few miles away from a larger one, and it faced $80 million in pension and healthcare debt with a $19 million annual budget as of 2010. The state intervened, meeting with the city’s retirees to ask them to voluntarily accept a cut to their retirement benefits. But workers rejected the plan, and in the end, Central Falls had to file for Chapter 9 bankruptcy. Local residents saw their taxes hiked and pensioners saw their benefits cut by up to 55 percent. Pension promises are not protected in bankruptcy.

This is not a future any Illinoisan should desire. And yet, lawmakers will be forced to reconsider the state’s rules on municipal bankruptcies in the near future. The math demands it.

One way to make that conversation more productive is to bring public-sector unions to the table and decide on what a fair amendment to the Illinois Constitution’s pension clause should look like. Even with pension reform, Harvey’s knot might still prove too gnarled. But many communities could avoid having to rely on the “sword” of bankruptcy and untangle their knots properly if lawmakers make pension reform a priority.

As the Illinois Policy Institute’s Adam Schuster describes in a new report, the 2013 bipartisan pension reforms struck down by the Illinois Supreme Court offer a good starting point for what change could look like, though five years of inaction since then will necessitate stronger medicine. A constitutional amendment that allows for changes in future benefits while protecting what public employees have already earned is key to making those changes possible.

If lawmakers continue to balk at building the tools necessary to reform pensions, bankruptcy will be the only way out for communities across the state.

The knots grow tighter each day.

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