Illinois cities seeing operations hobbled by pension debts under new law
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Two Illinois cities have been forced to lay off dozens of public safety employees after the state's comptroller was required by law to redirect tax revenue owed to the municipalities to underfunded pensions.
One expert says many more towns throughout the state could see problems similar to those in Harvey and North Chicago due, in part, to a state law that was passed in a matter of hours in 2011.
“There are hundreds of cities across the state that face some sort of effective bankruptcy if they have to start paying their police and fire pension costs,” Wirepoints President Ted Dabrowski said. “It’s only a matter of time before the state starts garnishing their tax revenues.”
Illinois’ local governments have been facing growing retirement costs for employees for years. Unable to keep up, some pay what they can and hope to make up the rest later.
Illinois’ police and fire pension funds outside of Chicago are 58 percent funded, on average, according to a report by the Commission on Government Forecasting and Accountability.
Sixty-three percent of Illinois’ 651 downstate public safety retirement funds received less funding than required from their cities in 2016, according to a Department of Insurance report.
Starting this year, those fund managers can report their town to Illinois Comptroller Susana Mendoza's office for being more than 90 days delinquent on their required payments. Once that debt is certified, the comptroller must withhold all of the funds the town is owed by the state until the total debt is paid. The city of Chicago, where pension funds are more than $38 billion in the hole, is exempt from the law until 2024.
“Once it's certified, the law requires us to redirect the payments to the pension fund – the Comptroller's office has no choice.,” said Abdon Pallasch, spokesman for Mendoza.
This process is unfolding in Harvey and North Chicago now, but is likely to expand to potentially hundreds of other communities too, Dabrowski said.
Harvey underpaid its police and fire pensions by $3.2 million in 2016. The police pension fund asked Mendoza’s office in January to withhold more than $7 million in delinquent pension payments the city skipped from 2007 to 2014. The city is fighting the certification in court, but was forced to lay off 40 police and fire department employees in the meantime.
The city of North Chicago’s fire pension fund went to Mendoza’s office to retrieve more than $863,000 in delinquent payments.
They’re not alone in directing budget funds elsewhere. Kankakee shorted its police and fire pensions by more than $700,000 in 2016. Champaign underpaid by $3.7 million. Normal shorted both police and fire retirement funds by more than $1.3 million. In East St. Louis, city officials are worried about a year’s worth of funds being held under the law because the city shorted public safety pensions by more than $3.7 million.
The law, passed in less than 12 hours in 2011, was part of pension reform that was partially struck down by a court challenge.
When a pension fund’s assets are worth less than 50 percent of their total unfunded liability, it becomes exceptionally difficult to raise the funding level, said Steven Malanga, George M. Yeager Fellow at the Manhattan Institute and City Journal's senior editor.
“It’s impossible to make that up out of your budget,” he said, because the investment returns and contributions are often dwarfed by the required minimum payments.
Pensions are protected by the state’s constitution, but Malanga says bankruptcy is a federally protected right that would trump the state’s protections. Bankruptcy protection would, he said, give cities in peril of losing vital services a chance to renegotiate those contracts. Illinois currently doesn’t allow for municipal bankruptcy.
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