Research & Commentary: The Growing Illinois Municipal Pensions Problem

Published June 9, 2015

On May 12 and 13, Moody’s Investors Service again downgraded Chicago credit ratings for the seventh time in two years. Its credit rating is now above only Detroit’s. 

These downgrades, which affect bond issues backed by property, sales, and motor-fuel tax revenue, will make servicing municipal debt more expensive and strain Chicago’s finances, which are already unable to cover the city’s spending and debt. Moody’s rationale for the downgrade focused on the city’s high unfunded pension liabilities. By conservative estimates, Chicago taxpayers face more than $20 billion in unfunded pension liabilities across the city’s four major pension funds. 

There are approximately 650 locally run pension funds in Illinois, most of which cover retired police officers and firefighters. Many of these pension funds are nearing insolvency. In 2014, the Illinois Policy Institute (IPI) audited Illinois’ 114 largest cities in an effort to measure the impact of local pensions on taxpayers, property taxes, and city budgets. IPI found many of the cities had experienced a significant decline in the health of their pension plans. A decade ago, 31 of the 114 cities received a score of 80 or above, but only one city reached that threshold in 2014. While only three cities were in critical condition in 2003, 80 percent of Illinois cities were in that category in 2014. 

The study found the ballooning pension debt can no longer be covered by property taxes. Ten cities spend 100 percent of their property taxes on pension costs. In the 20 largest Illinois cities, taxpayer contributions through property taxes increased by 157 percent over the past decade, whereas local government employee contributions increased by only 35 percent. 

A 2012 Policy Brief by The Heartland Institute found in the years 2000–10, taxing agencies in Cook Country, including Chicago, increased property taxes by an average of 48 percent. During that time, local governments increased numerous other taxes, including sales and excise taxes, to keep up with runaway spending and unsustainable pension obligations. 

The state’s debt problem may be worse than most realize, and governments will have to raise taxes unless they institute real reforms. If public sector union bosses do not accept sensible changes, more state workers will lose their jobs, taxes will increase, businesses will leave, and essential public services will be crowded out. Illinois already leads the Midwest in depopulation and faces the slowest economic recovery in the region. Ignoring the pension problem for another decade is not an option. 

Although the Illinois Supreme Court ruled even modest changes to existing public sector pensions are unconstitutional, other reforms are possible. Lawmakers should enroll all newly hired public sector workers in defined-contribution pension plans and give current workers the option of transferring into them. Under these plans, workers own their pensions and can change employers without losing their accrued benefits. Defined-contribution plans prevent the burden on taxpayers from automatically rising in future years. Finally, Illinois should allow cities such as Chicago to file for bankruptcy if union bosses won’t agree to even modest pension reforms to prevent cities from defaulting. 

The following documents examine state pension reform.

The Municipal Government Debt Crisis
The Heartland Institute and Truth in Accounting conducted a comprehensive analysis of Cook County’s taxing districts. The study “reveals how officials in many districts have misrepresented their financial condition by telling citizens their budgets were ‘balanced,’ when in fact they have been accumulating an overwhelming amount of debt,” the authors write. They found several taxing districts in Cook County, Illinois face an even more significant financial burden than cities currently in the news, such as Stockton, California.   

The Crisis Hits Home: Illinois’ Local Pension Problem   
Ted Dabrowski of the Illinois Policy Institute audits 114 of Illinois’ largest cities to expose the impact of local pensions on taxpayers, property taxes, and city budgets. 

Research & Commentary: Public Pensions and the Assumed Rate of Return
Heartland Institute Senior Policy Analyst Matthew Glans examines the problems facing state and local pension funds, how assumed rates of return affect pension fund debt, and proposals to change the projected rates of return on pension fund investments. 

The State Public Pension Crisis: A 50-State Report Card    
The Heartland Institute examines problems currently facing public pension systems, including the enormous burdens public employee pensions pose in some locations. The report ranks each state according to the operation and relative disposition of its pension plans and suggests ways states can solve their pension system problems. 

Keeping the Promise: State Solutions for Government Pension Reform
The American Legislative Exchange Council (ALEC) describes the variety of pension plans governments use today and the advantages and disadvantages of each type. ALEC provides several tools legislators can use to ensure governments can affordably fund retirement benefits for their employees. 

Research & Commentary: Defined-Contribution vs. Defined-Benefit Pensions
John Nothdurft, director of government relations at The Heartland Institute, provides a bullet-point comparison of defined-benefit pension and defined-contribution retirement plans. 

The Real Cost of Public Pensions
Jason Richwine discusses how to calculate the cost of public defined-benefit pension benefits, compares the cost of these benefits to private sector retirement plans, and refutes two common arguments regarding public sector pension plans. 

Fixing the Public Sector Pension Problem: The (True) Path to Long-Term Reform
Richard C. Dreyfuss of the Manhattan Institute examines various states’ pension reform efforts and recommends they borrow a page from the private sector by shifting to defined-contribution plans: “Under such plans, to which employees as well as employers may contribute, investment risk is borne by plan members, not by taxpayers. A majority of Fortune 100 companies have already adopted such plans. Only 16 percent of large companies still offer their retirees medical coverage. By sharing a complex of risks with the beneficiaries, states and municipalities would be able to devote far more of their time and resources to the more immediate concerns of today’s voters and taxpayers.”   

State Pension Funds Fall Off a Cliff
Barry W. Poulson and Arthur P. Hall consider different measures of historical and current funding shortfalls in state pension plans. The Public Employee Retirement Association of Colorado and Kansas Public Employee Retirement System are examined in-depth to find the fatal flaws that caused funding crises in these plans.  

The Gathering Pension Storm: How Government Pension Plans Are Breaking the Bank and Strategies for Reform
The Reason Foundation tackles the looming crisis created by states’ continued use of defined-benefit pension plans and offers solutions and reasons the current system is a disaster in the making.

Nothing in this Research & Commentary is intended to influence the passage of legislation, and it does not necessarily represent the views of The Heartland Institute. For further information on this subject, visit Budget & Tax News at, The Heartland Institute’s website at, and PolicyBot, Heartland’s free online research database at

The Heartland Institute can send an expert to your state to testify or brief your caucus, host an event in your state, or send you further information on a topic. Please don’t hesitate to contact us if we can be of assistance! If you have any questions or comments, contact Logan Pike, Heartland’s state government relations manager, at [email protected] or 312/377-4000.