Nearly 40 cents out of every education dollar in Illinois goes to pensions for retired educators; pension reform badly needed

Growing pension costs for retired educators and administrators are quickly crowding the classroom out of Illinois budgets. Pension costs are crowding out direct education spending throughout Illinois school districts.

In the coming school year, 39% of the money the state allocates to education will be diverted away from teachers and students to meet required pension payments. This represents a 458% increase in spending on teacher and administrator pensions since 2000, compared with a mere 17% increase in general education spending during that period, adjusted for inflation.

This massive growth in pension spending is especially concerning for younger teachers new to the workforce and parents with children enrolled in public schools whose needs will be delayed to make room for rising retirement costs.

Pensions aren’t the only thing crowding out student needs. Pensions take the first and largest bite out of the budget, then excessive administrative costs caused by Illinois’ overabundance of districts take another bite before any money actually gets to the classroom. Furthermore, district administrators tend to have some of the largest pensions with some collecting millions in retirement.

Since 2010 alone, spending on educators’ pensions more than doubled in nominal terms, jumping to nearly $6 billion in the 2022 budget from less than $2.1 billion. Education spending, including administrative costs, grew modestly to $9.2 billion from $7.3 billion.

Simply put, pension costs commanded just around 20% of the state’s total education spending only a decade ago, before doubling to nearly 40% of education spending today.

These growing costs take away dollars needed to operate local schools – especially poorer districts that rely heavily on state funding. This crowding-out effect is one reason pensions are a core driver of Illinoisans’ high property tax burden.

Without real pension reform, hundreds of schools across the state will continue to be forced to cut programs, increase class sizes, lay off teachers or hike property taxes as more and more new state dollars are directed away from classrooms and toward generous retirement benefits.

Rock Island property taxpayers paid $8.6 million in 2019, and just over $8 million – 94% of the taxes – went to pay public pensions.

Those taxpayers still owe more: $39,743 per household. That is how much they eventually must pay to satisfy the ballooning pension obligations politicians promised public workers in local and state pension systems.

“We’re just trying to keep our heads above water,” Rock Island City Manager Randall Tweet said. “I imagine it’s the same story in every town across Illinois.”

Local leaders and taxpayers have been saddled with pension systems created by state law and have virtually no options to reduce costs or improve sustainability on their own. According to information available from the county assessor, property taxes on a Rock Island home valued around the area average of $104,600 equal about $3,700, or 3.53% per year of the home’s value. That’s much higher than the Illinois average of 2.27%, which itself is more than double the national average.

A 2015 report by Taxpayers United of America found all of Rock Island County to have serious spending and pension problems at every level of government. The report called on unions to discuss with their member the unsustainability of such over-promised and under-funded pensions, which ultimately threatens the retirement security for public workers themselves.

Rising pension costs directly hurt taxpayers. In late 2019, Rock Island County Board Members approved an 8.9% property tax increase across the entire county, causing outrage among residents. KWQC caught one resident’s dismay: “We just can’t afford this type of taxation.”

Illinois’ worst-in-the-nation pension debt has become a well-known problem. Over $144 billion in pension debt for the five statewide retirement systems breaks down to nearly $30,000 in debt for each Illinois household, which must be paid with further tax hikes or further cuts to core government services.

Less well known is the nearly $75 billion of pension debt held by local governments such as Rock Island, which is the primary reason for Illinois’ second-highest in the nation property taxes. Combined with the state’s pension debt, politicians who mismanaged the pension system dug a $219 billion hole.

In Rock Island, the average household owns nearly $40,000 in state and local pension debt, with roughly $10,000 of that debt stemming from local systems for police, firefighters and municipal workers. If that pension debt became payable upon demand, each Rock Island household would see more than 80% of their $48,680 median annual income taken.

The city of Rock Island has almost $155 million in local pension debt, according to the most recent data provided to the state comptroller for fiscal year 2020. That debt includes nearly $73 million for fire pensions and $87.4 million for police pensions while subtracting the $5.4 million surplus from municipal pensions.

“We make our payments towards the pension obligations, but any increase [in pension obligation] means the general fund takes a hit,” City Manager Tweet said.

Pension experts consider a funding ratio of less than 60% to be “deeply troubled,” while a 40% funding ratio may be a “point of no return,” meaning an inability to make required contributions or maintain adequate funding levels – without painful cuts or serious structural reforms. The Rock Island firefighters fund is only 28% funded, while the police pension fund has only 36 cents saved for each $1 in future promises.

In many cities such as Rock Island, taxpayers are being asked to pay more to get less. Rising annual pension costs are crowding out local government spending on services that residents want and need.

In recent years, Illinois cities have already been forced to either lay off current workers, raise taxes or both to keep up with the cost of these pension systems. For example:

• Jerome, Geneseo, and Norridge raised property taxes to pay for pension costs in 2018.
• The south Chicago suburb of Harvey in 2018 laid off one-quarter of its police officers, more than half of its other police department personnel and 40% of its firefighters after the state intercepted money bound for the city under a pension law intended to force cities to make required pension contributions.
• In 2019, the pension intercept law was also triggered in North Chicago and East St. Louis. The resulting increase in pension costs for the cities’ budgets resulted in $1.3 million of cuts in North Chicago, including layoffs for three firefighters, and nine firefighter layoffs in East St. Louis.
• Peoria, which in 2018 eliminated 38 first responder jobs and 27 municipal jobs, has already been forced to cut an additional 45 jobs in 2020 after COVID-19 exacerbated the city’s pension-driven budget woes.

The combination of higher taxes and worsening services is a major reason Illinoisans have increasingly fled to other states. The 2020 Census marked the first time in 200 years that Illinois lost population between decennial Census counts, which was driven by migration of Illinois residents to other states.

Illinois’ state and local pension crisis is the most severe public policy challenge facing the state. It contributes to nearly every other fiscal and economic problem, including high property taxes, cuts to government services, economic stagnation and the Illinois exodus.

The only viable solution to Illinois’ pension crisis starts with a constitutional amendment to allow for reductions in future benefit growth for current workers and retirees. The current pension clause, which prevents changes not only to earned benefits but also the future growth rate of benefits for work not yet performed, is a pair of fiscal handcuffs on mayors left with few options besides hiking taxes and cutting services.

A “hold harmless” pension reform plan developed by the Illinois Policy Institute for the state’s systems can save roughly $2.4 billion for the state budget the first year and more than $50 billion through 2045. The plan would also totally eliminate the state’s pension debt during that time, rather than the 90% reduction state leaders hope for. It accomplishes all of that while preserving every dollar of pension benefits promised to public workers for work already performed.

Similar reforms to local pension systems could offer significant property tax relief to overburdened homeowners, free up resources for spending on current services, or finance a combination of the two. In Rock Island, such relief is sorely needed.

True pension reform, starting with a constitutional amendment, is the only way to stop the Illinois exodus by finally giving taxpayers value for their money.