By: Mark Glennon*
Why didn’t you tell us? How could you have done this to us? That’s the kind cry we’ll soon hear from both taxpayers and retirees in many local Illinois police and fire pensions when they finally realize how little of their pensions will be paid. Officials and pensioners’ unions haven’t leveled with them, whether because of cowardice or failure to look at plain math.
Just what solution is even conceivable for cities like Springfield, Joliet, Rockford and many others that have only 30% or 40% of their police and fire pensions funded? Chicago at least can pretend for now that additional taxes along with modest pension cuts are enough, but other troubled Illinois cities and towns simply don’t have any place they can raise taxes, and their pensions are insurmountable.
One public official who understands and has the courage to talk is James Palermo, Village of La Grange Trustee — a financial professional and Chartered Financial Analyst. “The village board recently voted to hike water and sewer fees and installed a new 1% restaurant tax,” he told me. “One trustee even suggested a property tax referendum to raise revenue beyond the statutory limit. Is it any wonder that Illinois has one of the lowest population growth rates in the country?” Only nickel and dime tax increases like that are available to most towns, and they won’t be enough.
Joliet, for example, has $250 million in unfunded debt for public safety pensions and the city has already had to cut its work force by about 100 employees the past few years. Rockford owes $180 million and its manufacturing base is decimated. The list goes on and on. Moline’s police fund was 41 percent funded in 2010. In Cairo, the firefighter system was 24 percent funded. As a group, police pensions outside Chicago were 56 percent funded in 2012, according to a Bloomberg article yesterday.
And those numbers are the artificially optimistic official numbers, based on bullshit, assumptions no independent financial economist supports.
Another city official on the level is Rockford Mayor Larry Morrissey, who has had the courage to say bankruptcy is needed. “Bankruptcy is designed to avert that kind of a slow, perpetual indentured servitude for individuals and corporations — why the hell should cities be treated differently?” said Morrissey.
I asked a leading Illinois Democratic legislator recently what solution is even conceivable for many Illinois cities. “There is none, except just to give them the money,” he answered. I won’t name him because that’s not the kind of thing he says in public. Besides, his answer is so obviously true if you look at the numbers. It’s also obvious that nobody, including the state, is going to “just give them the money.”
That legislator I mentioned also said Kankakee is probably the worst, and he might be right. Their pension is only 18% funded and their whole region is in trouble. Kankakee County is now cash-broke — laying off key personnel because it can’t keep up with current bills.
Making the problem worse are reporters who still underestimate the scope of the crisis. “Taxpayers and municipal employees have little idea just how poorly funded the pension plans are because few local media outlets report on it. In my seven years on the Village Board not a single local reporter has taken me up on my offer to describe La Grange’s pension problems,” Jim Palermo said.
The media and the public seem to think that a pension that has, say, 40% funding, still has a cushion of 60%, so insolvency is years away. That’s not how it works. Pensions need returns from fully funded pensions to meet their obligations. In other words, pay-as-you-go pensions, or something approaching that, are catastrophically expensive.
And bankruptcy is actually not a realistic option, for now. The Illinois Legislature would first have to approve letting Illinois cities file for Federal bankruptcy. When mayors start asking for that authorization do you think Madigan, Cullerton, Quinn and the boys will just turn over they keys to a bankruptcy judge? No, they will want to write their own version of a state insolvency proceeding, controlled by their appointees, protecting their friends at the public’s expense. A well-intended draft is already out there, but they would butcher it if they consider it, as we wrote here last month. That would cement the coffin shut.
Illinois remains in denial. This is a calamity.
*Mark Glennon is a business consultant and founder of WirePoints