Local pension bailout would make Illinoisans’ income tax bills rise as fast as their property taxes

Bailouts reward bad behavior. Reform rewards residents. Lawmakers should bend toward the latter.

East St. Louis, Illinois, is home to the highest murder rate of any American city. Two-thirds of its children live in poverty.

In other words, $2.2 million for the city goes a long way.

But thanks to the reckless promises of Illinois politicians, $2.2 million in state funding for East St. Louis is set to be “intercepted” by Illinois Comptroller Susana Mendoza’s office, and dumped directly into the local firefighters pension fund, which has just 9 cents on hand for every dollar it needs to pay future benefits.

This is Illinois’ pension crisis, where throwing money into a sinkhole of pension debt takes priority over the needs of vulnerable people today. East St. Louis is the fourth Illinois city facing confiscation of its state funding due to mounting pension debt. Dozens of other cities are susceptible to the same.

Pressure is building to do something, anything, to stop the pension pain. Local governments have hiked property taxes ad nauseam to fill the hole. In some communities, residents are tapped out. In others, the tax base has shrunk so much already that further hikes would be suicide.

Mayors and public-sector unions are casting an eye toward Springfield for help.

But the firehouse is ablaze.

A new report from Moody’s Investors Service pegged Illinois’ state pension debt as the worst in the nation, equal to 505% of the revenue the state brings in. (This was surely a relief to Illinoisans who thought the 2017 income tax hike they shouldered was for naught. Before the tax hike, that ratio was 601%. Phew.)

Moody’s estimated the state’s total pension debt at $240.8 billion, meaning that despite a soaring stock market, Illinois’ five state pension funds alone need $18,896 from every person in Illinois.

Springfield cannot put local pension debt directly on the state’s books. Gov. J.B. Pritzker said as much in response to Chicago Mayor Lori Lightfoot’s call for a state takeover of Chicago’s local pension funds. On its own, that would plunge the state’s credit rating into junk status.

But Pritzker has also refused to back even modest pension reform, meaning local governments will see no real, long-term relief.

So where does that leave Lightfoot and other mayors?

Ahead of fall veto session, momentum is building for consolidation of Illinois’ 650 suburban and downstate pension funds. If passed, this change will result in small but necessary savings on administrative fees and potentially yield larger investment returns.

Consolidation sounds harmless, but what should worry residents is whether consolidation is greasing the skids for a state bailout of local pension funds.

Of course, the state has no money to bail out the locals and little ability to borrow. That leaves one other option: large, statewide tax hikes, with every dollar dedicated toward pension debt.

Some potential options include a new tax on retirement income, an expansion of the sales tax to include services, and income tax hikes.

If voters approve Pritzker’s progressive income tax next November, the first and third options become much more likely.

Avoiding pension reform in favor of a bailout would be one of the most ruinous policy choices in the history of the state. Just as pension pressure has caused Illinoisans’ property taxes to skyrocket to second-highest in the nation, so too would it force lawmakers to create additional tax brackets and rate hikes under a progressive income tax scheme.

Illinois cannot and should not bail out local pension funds. But there is plenty it should do.

First on the list is an amendment to the Illinois Constitution allowing for pension reform. This problem can’t be fixed with tax hikes, and the sooner lawmakers realize that the better. Second is collective bargaining reform, allowing local leaders to drive tough but necessary deals for services their residents need. Third, the most distressed areas should collaborate with the state to provide an orderly, fair road to a brighter future, which could come in the form of municipal bankruptcy proceedings: a plan for a clean slate.

Bailouts reward bad behavior. Reform rewards residents. Lawmakers should bend toward the latter.