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Chicago City Wire

Wednesday, November 13, 2019

Illinois Policy Institute: Bailout of local pension funds could boost state's pension debt to $200 billion


By Rob Johnson | Sep 11, 2019


A state bailout of local pension funds for municipal workers in Illinois could lift its total pension debt to $200 billion, the Illinois Policy Institute think tank said Wednesday.

Illinois’ total pension debt now stands at $137 billion, the Illinois Policy Institute said.

Chicago Mayor Lori Lightfoot said last month that the city is facing an $838 million deficit in its 2020 budget, largely due to pension costs.

David Schuster, the institute’s director of budget and tax research, said in a note that Lightfoot has raised the possibility that the state would bailout Chicago’s pensions.

“But a bailout of local pension debt – Chicago included – would cause the state’s already massive annual budget deficits to explode, with pension contributions spiking by nearly 56%, or $5.67 billion, in fiscal year 2021,” Schuster said. “This would inevitably trigger tax hikes.”

Schuster said the state already spends more than 25% of its revenue on pensions and that the state cannot afford to add the costs of local pensions.

According to Schuster, official estimates put the combined local pension debt in Illinois at $63 billion, with $42 billion held by Chicago-related systems. He said the city’s pension debt burden is higher than those of 44 states.

Gov. J.B. Pritzker has ruled out a state takeover of municipal pension funds, saying that would reduce Illinois’ credit rating to junk status. But he has raised the possibility that local pension funds consolidate to pool their assets to raise investment returns.

Schuster said that it is not hard to see why Pritzker ruled out a bailout of local pension funds.

“Illinois’ pension to debt-to-revenue ration – one gauge of a state’s ability to repay debt – is over 600%, the worst in US history,” he said.

Illinois’ credit rating is the worst in the nation, mainly due to pension debt, Schuster said, agreeing with the governor that a bailout would lead to a rating downgrade and raise the state’s borrowing costs.

Schuster said consolidating pension funds could boost their efficiency through savings on administrative fees as well as possibly boost returns, but there are risks.

He said that lawmakers could push consolidation as a “silver bullet solution” but does not do anything to solve the debt problem, adding that consolidation likely would be used to push for a bailout of local pension funds by the state.

Schuster said the rising pension costs have hindered the state’s ability to fund the services its residents want and adding the costs of local pensions is not workable.

“Instead, Springfield must control those costs by leading the state toward constitutional pension reform that protects earning benefits while allowing reasonable adjustments to the growth of future, unearned benefits,” Schuster said.

Schuster said Tuesday in a separate note that amending the state constitution’s clause that the Illinois Supreme Court has ruled bars adjustments to any of the state’s retirement or pension systems does not meant entirely striking it.

Instead, he said, Illinois lawmakers should adopt language that is in line with other states that recognize distinctions between earned benefits that should be protected and future benefits growth that should be allowed to be altered to face current economic conditions.

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