Illinois lawmakers have passed a law requiring local governments to reduce pension benefits for newly hired police and firefighters. It follows similar reforms to other municipal government pensions that became law in early 2010.
Though municipalities establish and pay for the pensions, the funding rates are set by the state.
‘Going Way of the Dinosaur’
After the vote to require local governments to begin funding their pensions at actuarial levels, State Rep. Jack Franks (D-Woodstock) said, “It just makes sense. Defined benefit plans are going the way of the dinosaur because they’re unaffordable.”
Defined benefit plans guarantee pension benefits based on a formula related to years worked and wages earned. Defined contribution plans, such as 401Ks, which are common in the private sector, do not guarantee a particular level of benefits. They allow contributions to a retirement plan, often but not always with the employer adding to contributions an employee may make. The amount of money put into the plan and investment returns determine how much money a participant receives in retirement.
The legislature’s action came just a few days after the Chicago Tribune published a report stating some local government pensions are only 20 percent funded. State pensions are about 40 percent funded, which is conservatively estimated to be $85 billion in underfunding, the worst such level in the nation.
The Chicago Tribune estimated the underfunding in local government pensions in the Chicago area at more than $2,700 for each suburban Chicago household. The City of Chicago has an unfunded pension liability approaching $15 billion.
Tax Increases for Pensions
Tax increases to close the funding gaps are likely.
Chicago Mayor Richard Daley reacted to the new local pension funding law by telling reporters property taxes in the city could double to meet the pension funding requirement.
In northwest suburban McHenry, city officials had already decided to raise taxes. The city’s share of the sales tax increased 50 percent on January 1, from 1 percent to 1.5 percent. City officials said they had to raise the sales tax to pay police pensions. With the state and regional transportation portions of the sales tax added in, the total sales tax rate in McHenry has gone from 7 to 7.5 percent.
But that’s a bargain compared to Chicago, where city, county, state, and regional transportation shares of the sales tax total 10.25 percent.
Ironically, while the state is requiring local governments to begin meeting actuarial estimates for funding of their pensions, lawmakers have not imposed a similar requirement at the state level. Instead, the state government continues to divert money for state pensions to other spending.
Unions Buying Influence
The pension plans offered to firefighters, police officers, and other government workers have been overly generous for years, according to R. Eden Martin, outgoing president of the Civic Committee of the Commercial Club of Chicago, which has studied the local pensions issue.
“One problem is that the unions are the biggest contributors to political campaigns—on both sides of the aisle,” Martin said. He called for government pension providers to start lowering the pension payouts for current and new employees in any future contract negotiations and to extend the number of years a person must work before qualifying for a full pension.
“Otherwise, when it comes time to pay future retirees their pensions, there will be nothing there,” Martin said.
In some instances, he notes, local government workers can start receiving pension benefits with as little as 20 years on the job. That means a person can start work in his early 20s, retire from that job in his early 40s, take another government job for another 20 years, and have two pensions before age 65.
Phil Britt ([email protected]) writes from South Holland, Ill.