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 Chicago could be the latest municipality to face diversion of
state money as a result of a pension intercept law that took full effect in
2018. Under that law, municipalities that fail to make full contributions to
their police or fire pension funds can see state money meant for the local
government diverted directly to the pension funds instead.
According to The Bond Buyer, the Firemen’s Annuity and Benefit Fund of Chicago
filed two claims with the Illinois comptroller for a combined $3.3 million
shortage, alleging the city shorted it by $1.8 million in 2016 and by $1.5
million in 2017. While these are relatively small amounts for such large pension
funds, there is no ignoring the city’s enormous pension problem and its
crowding-out effects on core services for residents.
Bond Buyer reported that the city will likely contest the fund’s claims. The
amount of the full, or “actuarially required,” contributions to municipal
pension funds each year is determined by either the Illinois Department of
Insurance or an independent actuary employed by the pension fund or
municipality.
Under the pension intercept law, the Illinois comptroller must withhold state
funds owed to a local government once a pension fund makes a claim for pension
payments owed. For most municipalities, the comptroller can intercept all money
owed to local entities from the state – including sales and income tax
collections on behalf of municipalities – but for the city of Chicago, the
comptroller can only withhold grant money from the state.
Hearken back to Harvey
As a result of the more limited pool of money that is subject to withholding,
and the fact that Chicago shorted a smaller portion of its total pension
contribution, the Windy City is unlikely to face immediate consequences as
severe as those in Harvey, Illinois. In spring 2018, Harvey became the first
municipality to have state funds withheld under the pension intercept law. The
city laid off nearly half of its police and fire forces as a result.
That said, Chicago cannot avoid the consequences of pension crowd-out for long.
Chicago- related pension systems are nearly $42 billion in debt.
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Led by outgoing Mayor Rahm Emanuel, the city has
already pursued near-sighted solutions to its pension crisis.
Emanuel pushed through massive multiyear tax hikes, including a
property tax increase of $543 million, new taxes on ridesharing and
e-cigarettes, tax increases on water and sewer services and 911
calls, and hikes in fees ranging from garbage collection to building
permits.
The mayor also lobbied for the Illinois General Assembly to allow
Chicago to make reduced pension contributions over the course of
five years – set forth in public acts 99-0506 and 100-0023.
Contributions are set to spike by hundreds of millions of dollars
over the next five years, ending in an annual contribution that is
$1 billion higher than this year. Unfortunately,
Chicago and Harvey are not alone in facing pension-induced financial
crises that threaten to crowd out core government services. Peoria,
Illinois, recently issued layoff notices to more than two dozen
employees as a result of ballooning pension costs, even without
having faced an intercept claim by one of its pension funds. Nearly
60 percent of Illinois’ downstate police and fire pension funds did
not receive full payments in 2016, according to research by
Wirepoints, meaning hundreds of municipalities are vulnerable to the
state’s intercept law.
Addressing pension pain points
The cause of the local pension crisis in Illinois is that promised
benefits – or accrued pension liabilities – are growing far faster
than taxpayers’ ability to pay for them. The only
way out for Chicago and other struggling municipalities is
meaningful pension reform that starts with a constitutional
amendment to allow changes in future, not-yet-earned benefit
accruals for current workers and ends with moving all new hires into
401(k)-style personal retirement accounts.
Real, lasting pension reform is the only way to protect taxpayers
from further tax hikes, protect government worker retirement
security from fund insolvency, and ensure state and local
governments can continue to provide core services such as education
and public safety.
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