Chicago’s pension red alert
The Wall Street Journal’s article “Public Pension Red Alert” foreshadows more municipal bankruptcies countrywide as pension costs continue to spiral out of control. One of the cities facing the most stress nationally is Chicago. The city’s pension payments are set to jump to more than $1 billion as laws that allowed the city to skimp on pension payments...
The Wall Street Journal’s article “Public Pension Red Alert” foreshadows more municipal bankruptcies countrywide as pension costs continue to spiral out of control.
One of the cities facing the most stress nationally is Chicago. The city’s pension payments are set to jump to more than $1 billion as laws that allowed the city to skimp on pension payments come to an end. The Chicago Public Schools pension contribution is also set to rise to $600 million, crippling the district’s budget.
Moody’s recently downgraded the city of Chicago’s credit rating due to its bloated pension debt and the lack of a plan to deal with it. The city’s credit rating is now only three notches away from junk-bond status. Only Detroit is rated worse among the nation’s major cities.
But Chicago isn’t the only Illinois city feeling the pain. Cities across the state are struggling.
Cities such as Springfield have cut public works staff, sworn police officers and librarians to accommodate growing pension costs.
They’re also jacking up sales taxes and other fees to make ends meet.
Local pension funds in Illinois have seen their pension-funding ratios collapse and their unfunded liabilities jump even as taxpayer contributions have gone up significantly.
Outside of Chicago, nearly 650 locally run pension funds cover retired police officers and firefighters. Additionally, the Illinois Municipal Retirement Fund serves municipal retirees across the state. Just like Illinois’ five state-run pension systems, these funds are structured as defined benefit plans.
And just like Illinois’ state pensions, many are falling apart.
Many municipal funds for police and firefighter districts have less than $0.50 for every dollar they should have to meet their pension obligations going forward.
The city of Elgin, for example, has just $0.44 for every dollar it needs to pay for police pensions, while the city of Waukegan has only $0.46 for every dollar it needs to pay for pensions.
These funds make Detroit’s pensions look healthy.
In aggregate, Illinois’ local pension unfunded liabilities grew to more than $12 billion in 2010 from just $1 billion in 2000.
That means taxpayers are on the hook not only for bailing out state pensions – but they’ll also be asked to bail out the shortfalls in their local pension funds.
Municipal pensions are not in poor health for lack of taxpayer support; they are in poor health in spite of ever-higher taxpayer support. Property taxes have skyrocketed because they are the primary funding source for these municipal pension funds. Illinois has the second-highest property taxes in the nation, according to the Tax Foundation.
Illinois taxpayers are now contributing $2.75 toward city worker pensions for every $1 paid by the active employees themselves, and this gap is only getting wider. In Springfield, it’s $4 for every $1 paid by city workers.
And yet despite the higher taxes, cuts in city services and sicker pension funds, Illinois state legislators have done little to stop the bleeding.
Municipalities in Illinois have very little control over increases in pension costs. The Illinois General Assembly writes the pension laws and hands out pension benefits – but it’s the local cities that pay for them.
This lack of accountability is driving the whole system toward insolvency and pensions are no longer affordable.