House Bill 417 falls short of the structural reforms required by Illinois pension systems. A constitutional amendment is needed after the courts blocked a genuine reform effort in 2018.
Illinois lawmakers are trying to keep the Chicago Park District pension fund from going insolvent, but their solution mostly creates more debt and levies more taxes without addressing the real problem.
Lawmakers have adopted Bill 417 and Governor JB Pritzker is expected to sign it, giving the park district additional borrowing authority and the ability to raise property taxes beyond usual statutory caps. While it increases employee contributions for new hires, it does not include any change in benefits for current workers and retirees and allows workers to retire two years earlier, which is well below expectations. Benefits structural reforms needed to stabilize Illinois retirement systems.
Pension debt is the # 1 tax crisis Illinois faces. Illinois’ pension crisis is the worst in the country. Illinois has less than 40% funding ratio for its pension plans while the national average is more than 70% as of 2018. Pension debt estimates reached $ 317 billion in 2020, and state pension systems consumed more than 25% of all state income.
While these are the state’s retirement issues, Chicago has big issues as well.
The current state of the Chicago Park District retirement system is dire, with over $ 800 million in unfunded liabilities and only one 30% funding ratio. As it stands, it will run out of funds in 2027. Significant reforms were successfully passed in 2014, only to be declared unconstitutional by the courts because they changed existing pension benefits.
The 2014 reforms, voted in Public law 98-0622, attempted to address the pension crisis by lowering annual cost-of-living adjustments to a more financially sound level and increasing contributions from employers and employees. The annual adjustments were to be reduced by a compound rate of 3% which far exceeded inflation and employer-employee contributions would have been raised to a more tax-responsible rate. Before being declared unconstitutional, the 2014 reforms provided a model for the kind of reforms Illinois pension systems need.
New HB 417 does not include structural reforms. It is characterized as a lasting solution to the Parks District pension crisis, but does little to address it other than increasing taxpayer funding needs and allowing increased debt. . The bill essentially shifts the entire burden of Park District tax failures onto taxpayers and does not change the way employer and employee benefits or contributions are determined.
HB 417 includes provisions that are good and bad for the future of the park pension: increased funding for the pension system, allowing more bond issues by the park district pension, allowing increases in the property tax exceeding the statutory ceilings for the debt service of this surety authority, the retirement age of two years and the increase in employee pension contributions by 2% for new hires.
While reducing pension debt and increasing system funding ratios are important goals, spending money on the problem is not a sustainable long-term solution. Illinois retirement problems stem from generous benefits that are unaffordable to taxpayers, the main source of funding for public pensions.
The bill provides for a total of $ 250 million in additional bond issues. While proponents argue that this is a good way to give the pension system some leeway in the event of a market downturn, relying on bonds to fund other liabilities is dangerous. Essentially, it becomes a gamble with taxpayer money, to see if pension investments can earn more than interest on the bond, a strategy that has always failed.
While 2% increase in employee contributions is an important and necessary step to reduce the financial pressure on the pension system, it is barely sufficient to stem the crisis. In addition, this is partially offset by lowering the retirement age, so that workers benefit from the pension scheme for two more years.
The pension problem cannot be solved by simply adjusting the contributions for new hires and putting more money into the funds. Without fundamental changes in how pension benefits are determined and how much money employees and employers invest, the services and resources residents rely on will be the next sacrifice.
Changing the state’s constitution to allow for changes in future benefit growth for current workers and retirees is critical to creating a sustainable retirement system that preserves Chicago’s other services. This would allow for the kinds of changes that courts have ruled unconstitutional starting with the 2014 reforms.
Structural reform does not need to include cuts in benefits already promised. Rather, it should be about keeping future benefit growth at sustainable levels. Pension reform should both end the pension crisis and keep promises made to civil servants and retirees.