Editorial: Chicago can’t afford $3 billion more in pension obligations

Chicago firefighters, who risk their lives to keep us safe, deserve a decent living and a secure retirement.

So, don’t get us wrong when we call out irresponsible legislation moving through Springfield that would add an estimated $3 billion to Chicago’s out-of-control pension obligations over the next three decades.

In April, two bills passed out of committee in the General Assembly that would boost the pension benefits of Chicago firefighters hired after 2010. One would increase cost-of-living adjustments, and the other would boost the final average salary used in determining a pension.

The legislation would undermine an effort to reduce the growth of pension obligations by creating a less-costly system for recent hires. Participants in the Tier Two system, as it’s known, are supposed to get at least the same benefit they would receive if they participated in Social Security. Illinois lawmakers, true to form, failed to fully account for the cost when setting up the Tier Two benefits, which may need to be increased to meet this federal requirement.

Also true to form, no serious analysis has been done to justify the increases in the latest legislation for Chicago firefighters. And, shamefully, those measures would commit the city to paying out more money, while providing no state assistance to cover the additional obligations.

Outgoing Chicago Mayor Lori Lightfoot and other city leaders have protested, but this isn’t the first time Springfield has pandered to the favored firefighters’ union while sticking Chicago with a potentially catastrophic bill.

Two years ago, Gov. J.B. Pritzker signed a measure that similarly granted higher cost-of-living increases to Chicago firefighters. At the time, Pritzker claimed that selling the state-owned James R. Thompson Center would pay for his giveaway by putting that public building back on the property tax rolls, and he took an undeserved bow for supporting first responders.

He conveniently ignored that Chicago’s pensions for firefighters, police officers and general employees were funded at barely 20%, as of their Dec. 31, 2021, actuarial reports. In other words, they were short by about 80% of the money needed to pay existing obligations. Additional tax revenue from the Thompson Center sale will never come close to closing that enormous gap, as the governor surely knew even before he piled more obligations on top.

Lightfoot, who handed over mayoral power to Brandon Johnson on Monday, deserves ongoing credit for prioritizing pension payments that have helped to temporarily boost the city’s credit rating, and for acknowledging that if nothing structural is changed, the city won’t be able to pay what it owes its workers in retirement.

What structural changes? Well, probably more taxes. Illinois, for instance, could boost its revenues by taxing retirement income and/or by extending its sales tax to professional services, steps certain to anger important constituents. But what it needs most is an amendment to the Illinois Constitution that eliminates the pension protection clause, the key legal obstacle to necessary reforms.

Given that Illinois has Pritzker in the governor’s office, and an incoming Chicago mayor in Johnson who was bankrolled by the Chicago Teachers Union, serious progress may be too much to hope for, although we will be returning to the issue. For if nothing is done, let alone if more costs are piled on, the pension outlook is sure to get even worse.

Chicago, at least, has an out. If nothing changes to secure the pension funds, Chicago in theory could dump at least some of its obligations by filing for bankruptcy, as Detroit did a decade ago. Thousands of retired Detroit city workers endured 4.5% pension cuts, the end of cost-of-living increases and reduced insurance coverage. That would be terrible for all concerned, and would be the kind of reputational blow Johnson will want to avoid, but the long-term outlook for Chicago’s finances makes it a continuing possibility.

Illinois has no similar option, as the states (under current law) can’t declare bankruptcy. And despite recent increases in its credit ratings, the short-term improvement doesn’t solve the bigger problem. According to their actuarial valuations, the state’s retirement systems are funded at between 45% and 22%, depending on the system. Altogether, state and local public pension funds are short by more than $200 billion — by some measures, a lot more — with most of that shortfall in the state’s five plans.

Under Pritzker, Illinois has failed to solve the bigger, systemic issue, but it has taken some positive steps. Earlier this month, Pritzker signed a bipartisan bill extending a pension buyout option for state employees, and the state made an additional $500 million contribution to the retirement systems above required amounts for fiscal 2022 and 2023.

Those are smart moves, but don’t applaud too loudly. The state continues to use a pension formula that keeps its required contributions at only 90% of the amount needed to get fully funded. If the financial markets were to turn down, as they eventually always do, the state’s unfunded pension liability would soar, and Illinois would need to increase its required contribution just to remain at the insufficient 90% level. Talk about a ticking time bomb.

Governor, veto those irresponsible firefighter bills if they make it through the General Assembly. Follow the direction of The Civic Federation and undertake a comprehensive analysis of all pension programs that apply to more recent hires. While you’re at it, adopt a funding method that covers at least 100% of the liabilities the state is accumulating. Otherwise, both Chicago and Illinois will fall further behind.

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