Illinois’ rising property taxes driven by $75 billion local pension debt

Adam Schuster

Senior Director of Budget and Tax Research

Adam Schuster
September 27, 2021

Illinois’ rising property taxes driven by $75 billion local pension debt

Rapidly rising property taxes and growing pension costs leave homeowners asked to pay more to get less. Relief requires structural pension reform, starting with a constitutional amendment.

Illinois’ worst-in-the-nation pension debt has become a well-known problem. Over $144 billion in pension debt for the five statewide retirement systems breaks down to nearly $30,000 in debt for each household, which must be paid with further tax hikes or further cuts to core government services.

Less well known is the nearly $75 billion of pension debt held by local governments in Illinois, which is the primary reason for Illinois’ second-highest in the nation property taxes. Combined with the state’s pension debt, politicians who mismanaged the pension system dug a $219 billion hole that handed $45,151 in pension debt on average to each Illinois household.

But local pension debt varies widely based on where a taxpayer lives in Illinois. And there is a way to climb out of Illinois’ pension abyss.

Chicago significantly drives up the state average because it has accumulated more pension debt than 44 U.S. states. Chicago’s police pension fund is just 22% funded and the firefighters’ pension fund has just 18 cents saved for each $1 in future promises.

Pension experts consider a funding ratio of less than 60% to be “deeply troubled.” A 40% funding ratio may be a “point of no return,” meaning an inability to make required contributions or maintain adequate funding levels – without painful cuts or serious structural reforms.

In at least 20 other large municipalities in Illinois, pension debt has grown to crisis levels. Each of these 20 cities and towns has a public safety pension fund with less than 50 cents saved for every $1 in future promises. All of them have populations above 25,000 – except for Harvey and Melrose Park, where populations have recently dropped just below that threshold.

Pension debt per household in these municipalities ranges from $34,412 in Carbondale to $47,341 in North Chicago, which is both the local debt and each household’s share of the state’s pension debt. In seven of these cities and towns, annual taxpayer pension contributions are larger than the entire annual municipal property tax levy. And in another six, per household pension debt exceeds the area median household income reported by the Census Bureau.

The local pension crisis drives property tax hikes as mayors and other local leaders struggle to keep up with the growing financial burden. Local leaders have been saddled with pension systems created by state law and have virtually no options to reduce costs or improve sustainability on their own.

In these 20 cities, and others, taxpayers are being asked to pay more to get less. Rising annual pension costs are crowding out local government spending on services that residents want and need. In recent years, Illinois cities have already been forced to either lay off current workers, raise taxes or both to keep up with the cost of these pension systems. For example:

  • East St. Louis has cut its active police force in half since 2003, a much larger reduction than the 16% drop it has seen in its population.
  • In 2019, the pension intercept law was triggered in North Chicago and East St. Louis. The resulting increase in pension costs for the cities’ budgets resulted in $1.3 million of cuts in North Chicago, including layoffs for three firefighters, and nine firefighter layoffs in East St. Louis.
  • Danville in 2017 hiked its special public safety pension fee, which is levied on top of normal property taxes, by 178% to $267 per year.
  • Alton was forced to sell off its water and sewer system to try to keep pace with the rising cost of local pension funds in 2019 and Granite City followed suit in 2020.
  • Jerome, Geneseo, Norridge and Moline raised property taxes to pay for pension costs in 2018.
  • Rock Island raised property taxes 8.9% to pay for pensions and Niles raised them nearly 5% in 2019.
  • Rockford leaders were told by consultants that to absorb rising pension costs without running out of money in five years, the city would have to eliminate 40 sworn police officer positions, close down an entire fire station, freeze all city employee wages to 2019 rates and sell its water system.
  • The south Chicago suburb of Harvey in 2018 laid off one-quarter of its police officers, more than half of its other police department personnel and 40% of its firefighters after the state intercepted money bound for the city under a pension law intended to force cities to make required pension contributions.
  • Peoria, which in 2018 eliminated 38 first responder jobs and 27 municipal jobs, has already been forced to cut an additional 45 jobs in 2020 after COVID-19 exacerbated the city’s pension-driven budget woes. Additionally, the city in 2019 implemented a special property tax fee for pensions that ranges as high as $200.

The combination of higher taxes and worsening services is likely a major reason Illinoisans have increasingly fled to other states. The 2020 Census marked the first time in 200 years that Illinois lost population between decennial Census counts, which was driven by migration of Illinois residents to other states.

The onset of the COVID-19 pandemic has made the financial challenge posed by local pension debt even more severe. Cook County Treasurer Maria Pappas told The New York Times that in the COVID-19 era, the condition of local pensions is “like a rubber band that’s been stretched too thin” and warned “the rubber band is about to break.”

Local government layoffs have been the largest contributor to job losses during the pandemic and a barrier to reaching pre-pandemic employment levels. If so many cities and towns throughout the state weren’t struggling with unsustainable growth in pension spending, many of these layoffs could have been avoided.

Illinois’ state and local pension crisis is the most severe public policy challenge facing the state. It contributes to nearly every other fiscal and economic problem, including high property taxes, cuts to government services, economic stagnation and the Illinois exodus.

While legislation passed in 2019 to consolidate local pension fund investments will help the funds earn modestly better returns, that effort falls far short of the structural reforms needed to stabilize the local pension crisis. The bill also allowed pension benefit enhancements that will grow pension debt and failed to fully consolidate downstate police and fire funds, because it kept the roughly 650 local pension boards in charge of benefit administration.

The only viable solution to Illinois’ pension crisis starts with a constitutional amendment to allow for reductions in future benefit growth for current workers and retirees. The current pension clause, which prevents changes not only to earned benefits but also the future growth rate of benefits for work not yet performed, is a pair of fiscal handcuffs on mayors left with few options besides hiking taxes and cutting services.

A “hold harmless” pension reform plan developed by the Illinois Policy Institute for the state’s systems can save roughly $2.4 billion for the state budget the first year and more than $50 billion through 2045. The plan would also totally eliminate the state’s pension debt during that time, rather than the 90% reduction state leaders hope for. It accomplishes all of that while preserving every dollar of pension benefits promised to public workers for work already performed.

Similar reforms to local pension systems could offer significant property tax relief to overburdened homeowners, free up resources for spending on current services, or finance a combination of the two.

True pension reform, starting with a constitutional amendment, is the only way to stop the Illinois exodus by finally giving taxpayers value for their money.

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