Northern Illinois University: Police and Fire Pension Funds In Trouble

The Center for Governmental Studies at Northern Illinois University has published a policy analysis finding that the pension funds servicing Illinois police and firefighters outside of Chicago are in poor fiscal health.  Not only are many of these funds carrying significant amounts of debt, but the debt they carry  leaves them worse-off than the much more publicized problems facing the State Employees Retirement System (SERS) and the Teachers Retirement System (TRS).

Readers of my blog are probably aware that I fervently believe that one of the worst, if not the worst, public policy problem facing Illinois is the growing pension debt within the public pension systems.  Not just the 5 state-funded systems, but defined benefit pension plans that provide retirement benefits to public employees at various levels of government.  Organizations like the Civic Federation do a tremendous job analyzing not only the poorly-funded state systems, but the multitude of defined benefit pension funds set up for employees who live and work in various government capacities throughout Chicagoland.

Why is the growing pension debt so important?  Because as the pension debt gets larger and larger in these funds, the state and other units of government will have to dedicate more and more revenue toward debt service instead of vital public needs like capital infrastructure, education, public safety, public health and parks and recreation.  In other words, the state and any other affected levels of government will be saddled with a structural deficit.  Imagine a monthly credit card payment.  If the card user occasionally spends a little more than he or she should have, the credit card payment is probably manageable.  If the person is a wild spender and only makes the minimum payment, the debt begins to spiral upward to the point where the minimum payment keeps getting larger and larger.  It can quickly go from 5% of an individual's income to 10% to 15% to 20% and so on.  This obviously leaves less money each month for other necessities.

Here's where the analogy breaks down for these police and fire pension funds.  According to the analysis, the Illinois General Assembly has on several occasions increased the retirement benefits for police officers and firefighters.  And get this...the state legislature that increases these benefits for municipal police and firefighters puts absolutely no money into the funds to keep them solvent.  Nope.  They leave that to the taxpayers of each municipality that has these funds. 

Back to the credit card analogy.  Now imagine that someone had a credit card debt they were earnestly trying to pay down.  Their credit card bill arrives in the mail and, to their shock and dismay, hundreds of dollars in new purchases they didn't make are on the card and they can't get the credit card company to remove them.  That's essentially what's happening with these local police and fire pension funds.  

So what's going on?  A poorly-designed system leaves these funds at the mercy of politics and election cycles.  Hundreds of cities throughout Illinois have police and fire pension funds.  Local taxpayers pay property taxes into these funds.  State legislators receive political contributions and campaign assistance from police and fire unions.  Once elected, these legislators repay the police and fire unions by sweetening their pensions without using any state money.  Each pension increase creates expanded debt overnight for which no money had been set aside.  Why is this debt created so suddenly?  Because the pension increases aren't restricted to new hires, but apply to anyone in the system.  Someone close to maxing out on their pension and retiring gets an upgrade for all previous years of service even though the upgrade hadn't been funded for all those previous years.  Individual cities have no say in this matter, but find themselves having to levy more and more property taxes for the funds.  And local taxpayers, well, they get stuck with the tab and will be on the hook for these funds if they go belly-up.

The state legislature and various Illinois governors are largely responsible for the funding crisis afflicting the 5-state funded pension plans.  It looks like they can add the municipal police and firefighter pension funds to this glowing resume.