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 fixing 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 changes in benefits for current workers and retirees and allows workers to retire two years earlier, which is well below Benefits structural reforms needed to stabilize Illinois retirement systems.
Pension debt is the # 1 tax crisis Illinois faces. The Illinois pension crisis is the the worst in the country. Illinois has less than 40% funding ratio for its pension plans while the national average is more than 70% from 2018. Retirement debt estimates reached $ 317 billion in 2020 and the public pension systems consumed more than 25% of all state revenues.
While these are the state’s pension issues, Chicago also has big problems.
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. In its current state, it will run out of funds in 2027. Significant reforms were successfully adopted in 2014, to be invalidated by the courts as unconstitutional because they made changes to existing pension benefits.
The 2014 reforms, passed in Public law 98-0622, tried to resolve the pension crisis by reduce annual cost of living adjustments at a more financially sound level and by increasing employer and employee contributions. The annual adjustments were to be reduced by a compound rate of 3% which far exceeded inflation and employer-employee contributions would have been increased 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 unaffordable for 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 wiggle room in the event of a market downturn, it is dangerous to rely on obligations to fund other liabilities. Essentially, it becomes a gamble with taxpayer money, to see if pension investments can earn more than bond interest, a strategy that has a failure story.
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 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.
Modification of the state constitution enabling changes to future benefit growth for current workers and retirees is essential 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.