This op-ed was written by Ted Dabrowski and featured in Forbes on November 3, 2014.
Cities across the country are finding ways to deal with their pension crises.
San Jose increased city-worker pension contributions and cut their pay to make ends meet. Atlanta required workers to contribute more to their pensions as well, but also cut cost-of-living adjustments. Others, such as Lexington managed to bargain their way, at least for the time being, out of their pension crises.
And, where reform and bargaining were no longer options, cities such as Stockton, Cedar Falls and most notably, Detroit, turned to bankruptcy. Bankruptcy in federal court allowed those cities to bypass state constitutional protections and cut pension benefits.
A Different Picture in Illinois
The examples of these cities stand in stark contrast to the situation in Illinois, where municipalities are in a straightjacket when it comes to reforming their out-of-control pension costs.
For years, mayors in Illinois have clamored for more control over their state-directed but locally funded pension systems. But their petitions have fallen on deaf ears in the General Assembly. Local communities remain captive to a system in which the Statehouse sets municipal pension benefit levels with little regard to whether a city and its taxpayers can afford them.
Illinois’ mayors are stuck: The state’s constitution prohibits the diminishment of pension benefits, making changes to pension laws a bitter battle between unions and reformers. State legislators have refused to pass any sort of municipal pension reform, even for future benefits. And municipalities looking to end their crises can’t file for bankruptcy without state approval, closing the route taken by Stockton, Detroit and other cities.
As a result, little is getting done in the state with the nation’s worst pension crisis and lowest credit rating.
State Won’t Give Local Leaders Power to Reform
The problem in Illinois is simple: State legislators don’t want to reform municipal pensions, but they don’t want to give local leaders the power to reform them, either.
Mayor Larry Morrissey of Rockford, Illinois’s third-largest municipality, knows his city is in trouble. The city’s pension funds have been in poor shape for years—taxpayer contributions to the funds have doubled over the decade and yet, collectively, Rockford’s pensions have only 67 cents for every dollar needed to pay out future benefits. It’s no wonder he says his city is “boxed in.”
But Morrissey isn’t the only mayor that feels this way. Illinois has more than 650 locally run pension funds—43 percent of the country’s public pension plans, according to Marquette Associates—covering retired police officers and firefighters, along with one consolidated fund for municipal retirees.
A great deal of those police and fire pension funds are nearing insolvency, with many having less than half the funds they need. In aggregate, these local pension systems’ unfunded liabilities—excluding Chicago—grew to more than $12 billion in 2010 from just $1 billion in 2000. That means taxpayers are on the hook not only for the state’s $100 billion pension shortfall—they’re also responsible for bailing out their local pension funds.
New Law Leaves Little Choice
But what’s really got some municipalities scrambling is a new state law that requires cities to fully fund their annual “Actuarially Required Contribution” beginning in 2016. If cities don’t make their full contributions—and most of them can’t—the law allows the state comptroller to redirect state funds away from municipalities to cover their pension payments.
With state law compelling municipalities to fund pensions while, at the same time, offering no paths to reform, communities will continue to do what they’ve been doing: cutting services and raising taxes.
Springfield, the capital of Illinois, has already closed three library branches, shrunk its police department by nearly 15 percent since 2007 and, tripled its general fund taxpayer contributions to city pension funds since 1999. Peoria, home to Caterpillar Inc. and some of the worst-funded pensions in the state, has made major cuts to its public works staff, added new utility and gas taxes, and doubled trash collection fees.
This is bad news for Illinois residents who already suffer the second-highest property taxes in the nation, according to the nonpartisan Tax Foundation. Taxes have skyrocketed because they are the primary funding source for these municipal pension funds. Three counties in Illinois—Kendall, Lake and DeKalb—already rank in the top 20 nationally for property taxes. Altogether, 17 Illinois counties rank in the top 100 nationwide.
A Small Town’s Move
Given the facts, opposition to what one small Illinois municipality is trying to do seems almost farcical.
North Riverside, a Chicago suburb of 7,000, has run out of options to control its pension costs. The village, which skipped payments in four of the last 10 years in order to avoid massive service cuts, has already trimmed the village’s headcount, raised sales taxes to the maximum rate and even added a “Places for Eating Tax” to increase revenues.
It has exhausted its funding options. That’s why North Riverside is trying to innovate its way out of its crisis by contracting a private provider to run the village’s fire service. The mayor wants to move North Riverside’s 17 firefighters, and their full salaries, to the same private company that has successfully run the village’s paramedic services for more than 20 years.
By making the move, the village can cut its $1.8 million budget deficit by nearly 40 percent, end its reliance on pension plans (the private company will provide 401(k)s) and cut its worker compensation costs.
Break the System to End the Pension Crisis
If Illinois wants to end its pension crisis, it needs to break the system wherein state legislators get the political benefits of handing out pension benefits while cities are forced to pay for them.
Mayors are frustrated. They want the tools necessary to bring their budgets under control. Rockford’s mayor has even called for options such as bankruptcy and 401(k)-style reform plans for municipalities to bring their pension costs under control.
Without those options, the mayors’ only way out of the pension straightjacket will be to pull a Houdini.