Pension costs are forcing the city of Peoria, Illinois, to dump 38 emergency worker positions, and to possibly tax property owners $50 if they have at least a shed on their property. Peoria joins the south Chicago suburb of Harvey as another warning of the looming financial crisis caused by Illinois’ unsustainable state and local pension debt.
According to the Peoria Journal Star, the Peoria City Council voted Nov. 13 to eliminate 22 firefighter and 16 police officer positions. Not all lost positions will result in layoffs, as some employees may take retirement incentives, and some vacancies will go unfilled.
The council also took the first step to approve a parcel fee that would go directly to pensions. The fee would tax an estimated 38,819 property owners $50 for every lot containing a building smaller than 5,000 square feet. The fee jumps to $300 for the estimated 2,630 buildings larger than 5,000 square feet. City leaders project collections of $2.2 million the first year, but they will gradually raise the fees to $70 and $500 by 2023 for a total take of $3.3 million.
Both measures are intended to help close a projected $6 million budget shortfall driven by increasing pension contributions.
In August, Peoria leaders sent layoff notices to 27 municipal employees after unions rejected a cost-saving plan requesting four furlough days.
Peoria provides a stark example of how Illinois taxpayers are being asked to pay more for less as a result of pension contributions crowding out core government services. According to Peoria City Manager Patrick Urich, 85 percent of the city’s property tax revenue currently goes to pensions, rather than services.
The city’s 2018 budget warns, “[T]he growth in pension obligations is crowding out the use of property taxes for operations.” According to projections included in the document, the city will no longer be able to use any property tax dollars for operations starting in 2019. The only way out, according to the budget, is a “comprehensive solution” from the Illinois General Assembly.
According to reports from the Illinois Department of Insurance, the city’s police and fire pension funds have $145 million and nearly $128 million in unfunded pension liabilities, respectively, and just over 50 cents on hand for every $1 needed to pay for currently projected pension promises. Both funds now have more retirees collecting pensions than active participants paying into the system.
In 2017, Peoria contributed over $9 million to the police pension fund and $8.4 million to the firefighters’ pension fund. That’s money that can’t be used to provide services.
The average annual salary for Tier 1 employees, or those hired prior to 2011, enrolled in the police pension plan is nearly $100,000. For Tier 1 fire employees, the average annual salary is nearly $94,000. Meanwhile, the median household income in Peoria is just $46,547.
On top of the public safety pensions, 20 Peoria retirees enrolled in the Illinois Municipal Retirement Fund have each already received more than $1 million in lifetime pension benefits. Those same employees, meanwhile, contributed an average of just $72,000 to the pension system.
While pensioners themselves are not at fault for the system’s failures, taxpayers can no longer afford these excessive benefits – especially at a time when property taxes are already driving people out of their homes. Peoria County’s average effective property tax rate is 2.7 percent, according to ATTOM Data Solutions, a property data company. That’s well above the state average. Peoria is also losing residents faster than any other major city in Illinois.
A comprehensive solution
A recent report from the Illinois Policy Institute lays out exactly the type of comprehensive solution Peoria called for in its 2018 budget proposal.
To provide relief to state and local budgets – and the taxpayers who fund them – Illinois must amend the state constitution’s pension clause to make clear that while already-earned benefits are protected, future increases in those benefits are subject to change.
After a constitutional amendment is enacted, struggling cities like Peoria and Harvey can benefit from reforms to their pension systems that bring them in line with what taxpayers can afford. To reduce pension liabilities, reforms should focus on the following concepts:
- Increasing the retirement age for younger workers, to bring them in line with private-sector retirement ages
- Capping maximum pensionable salaries to limit excessive pensions
- Replacing permanent compounding benefit increases with true cost-of-living adjustments, or COLAs
- Implementing COLA holidays to allow inflation to catch up to past benefit increases
- Ensuring government worker retirements are predictable and sustainable going forward. To achieve that, all newly hired employees should be automatically enrolled in 401(k)-style retirement plans, similar to what’s overwhelmingly used in the private sector.
Pension reform is a moral imperative. The alternative is a future in which core services are cut, taxes are raised and pensioners risk losing what they’ve already been promised as the funds go insolvent.
