Bankrupt Illinois Cities Forced to Cut Services to Fund Pensions

-edited

Multiple cities in Illinois are forced to cut police, fire departments and other city services to fund pension plans.

Third Domino

Illinois does not allow cities to file for bankruptcy but that is the best word to describe many of them. East St. Louis is the latest.

What Follows is a Guest Post from Wirepoints

My comments at the end.

Wirepoint reports Third domino falls: Illinois Comptroller set to confiscate East St. Louis revenues to pay for city’s firefighter pensions.

On Tuesday, the East St. Louis’ firefighter pension fund demanded that Illinois Comptroller Susana Mendoza intercept more than $2.2 million of East St. Louis city revenues so they could be diverted to the pension fund.

The fund trustees said the city shorted firefighter pensions by $880,000 in 2017 and another $1.3 million in 2018. Under a 2011 pension law, the state comptroller gained the powers to intercept city revenues on behalf of police and fire pension funds shorted by their municipalities.

Harvey was the first municipality to run afoul of the intercept law. North Chicago, a Chicago suburb of 30,000, was the second. Now it’s East St. Louis’ turn.

Back when Harvey was first intercepted last year, Wirepoints reported that comptroller confiscations could wreak havoc on hundreds of Illinois communities, potentially creating a domino effect. Hundreds of Illinois’ 650 pension funds have not received their statutorily required contributions from their respective cities in recent years, meaning the intercept law could go into wide usage under a broader crisis scenario. In the most recent analysis of Illinois Department of Revenue data, nearly half of the 650 funds were not properly funded in 2017 (see details below).

That domino effect could be exacerbated given that municipalities have virtually no control over their own pension funds. State law sets all the rules and pensions are protected by the Illinois Constitution, meaning that in a market downturn, the pension funds may have little choice but to demand more intercepts.

The intercept law was first utilized in 2018, when Harvey, Illinois, revenues were garnished to pay the city’s police and firefighter pension funds.

That intercept of nearly $3.3 million led to the layoff of 40 public safety workers so the city could avoid insolvency. The city found it couldn’t simultaneously pay for both current workers and pensioners. The city and the pension plans eventually reached a deal that relieved some of the pressure on the city.

East St. Louis’ fire and police pensions are some of the worst funded in the state, with funded ratios of just 31% and 9%, respectively. In total, the city has a shortfall of more than $104 million in its public safety pension plans, according to Illinois’ Department of Insurance. That’s more than $9,700 per household in a community where 43 percent of people live below the poverty line.

And with just $6.1 million in assets and annual payouts to beneficiaries totaling $3.7 million, the city’s fire fund has the equivalent of only two years of payouts in its accounts today.

Illinois cities – from Kankakee to Danville to Alton – need pension fixes before costs bankrupt them. And while state politicians have effectively quashed any chance for reforms now, that shouldn’t stop city officials from demanding real changes.

Municipal leaders across Illinois need to demand the following if they want their cities to survive Illinois’ collective crisis:

  1. An amendment to the constitution’s pension protection clause so pensions can be reformed and workers’ retirement security saved;
  2. The ability to convert pensions to defined contribution plans for workers going forward;
  3. A freeze on retirees’ cost-of-living adjustments (while protecting small pensioners) until pension plans return to health;
  4. Public sector collective bargaining reforms so officials can hold the line on new labor contracts, and;
  5. And the possibility of a fresh start through the ability to invoke municipal bankruptcy.

The troubles brewing in Illinois are all happening during one of the longest economic expansions ever. When the economy and the stock markets inevitably correct, things will only get worse.

Without the above reforms, East St. Louis, North Chicago and Harvey might only be the first in a long list of collapsing cities.

Mish Comments

What Illinois needs most is point 5, bankruptcy reform.

Points 1-4 can only happen if 5 is addressed. There will be no bargaining until unions face the threat of court bankruptcy decisions.

Pet Peeve

Under current law, states have the right to allow bankruptcies or not, but once they do, bankruptcies proceed through Federal, not state, bankruptcy courts.

One of my major pet peeves with the Trump administration is that it failed to reform bankruptcy laws at the national level.

Trump had two years to address this issue and did nothing. Why Rand Paul failed to introduce legislation is also a mystery.

Corrupt Illinois, in deference to public unions, refuses to act.

The citizens of East St. Louis, North Chicago, Harvey, Danville, Rockford etc are at the mercy of state funding laws even to the point of the state confiscating city funds needed to provide adequate police and fire protection for cities.

Two Years and Counting

Eventually, an Illinois city will be forced to fire its entire police or firefighter force to fund pensions.

We don't have long to wait.

East St. Louis has only two year's cash left in which to pay firefighters.

I expect a case will then make it to the Supreme Court and hopefully we will have a national resolution.

Mike "Mish" Shedlock

Comments (75)
No. 1-25
jivefive99
jivefive99

As a fellow white guy, you know that nobody gives a darn if poor black suburbs like Harvey, ESL and N Chicago have no police or fire services at all (a la Detroit). Now, when you hear lilly-white Naperville is having a pension prob, NOW we have a priority ...

shamrock
shamrock

They contributed $3.4M and payed out $3.7M. Seems like they could continue on this pay as you go basis for quite a while.

Country Bob
Country Bob

Chicago -- Another socialist success story

Harry-Ireland
Harry-Ireland

Well Mish, you might consider expediting your departure from Illinois. Any idea where you might go?

Latkes
Latkes

In 2013, the per capita homicide rate in East St. Louis was about 18 times the national average, and had the highest homicide rate of any city in the United States.

Sounds like heaven.

Mish
Mish

Editor

"Well Mish, you might consider expediting your departure from Illinois. Any idea where you might go?"

Time Set - Between May and September 2020 Location Set: St. George UT

Goodbye Illinois, Hello Utah

numike
numike

I am looking across the river at this moment at E St. Louis I dont know how socialist it is but it is decayed https://www.youtube.com/watch?time_continue=1&v=8FJcUT8ud7c

Stuki
Stuki

"Illinois Comptroller set to confiscate East St. Louis revenues to pay for city’s firefighter pensions."

Welcome to America: Where we're too incompetent to create any value, so we instead confiscate that which our betters create!

And the Jihadistans are somehow supposed to be worse?????? than this dump? Their youth supposed to not be perfectly OK with this blot off the map?

numike
numike

And whatever socialism persons talk about on here I think it missed E St. Louis!!

2banana
2banana

2banana's Rule: Democrat rule + public unions + free sh*t army = misery, ruin and bankruptcy

  1. Public unions are, by far, the largest all time political campaign donors. And they give nearly every penny to democrats.

  2. No democrat candidate could win a primary or a blue city/state general election without the public union’s money and support.

  3. Democrats pay back public unions with insane benefits and pensions in government/public union contracts.

  4. In turn, public unions are usually “closed shop” forcing, as a condition of employment, membership. Public unions also take their union dues before a public union employee ever sees their paycheck. It is one corrupt feedback loop.

  5. The democrats will never turn on public unions. Even when their city and state turns into a Detroit and is in ruins. They will raise taxes to infinity and sell every public asset before one $200,000 OT-spiked-taxfree-disability-free-medical-for-life and retire after 20 years at age 51 public union pension is touched.

Top All Time Political Money Donors: https://www.opensecrets.org/orgs/?id=

Country Bob
Country Bob

Mish doesn't mention all the states that switched to right to work states, and many of them canceled their pension setups. Sometimes, it required voter approval sometimes not. But legally speaking the states are all sovereign and can nullify pensions at a whim.

Chicago doesn't want to fix their problem. They could vote a different speaker in Springfield. They could vote for a governors and mayors who aren't crooks.

The people of Chicago VOTED to have a problem. After being fully informed, they voted to make the problems worse and worse.

magoomba
magoomba

Maybe they will just let the place burn down.

Casual_Observer
Casual_Observer

Well more bad news for Trump today. If the conversations with Putin ever get fully revealed he is toast. Someone in the White House actually reported him as a traitor to the United states. This should be fun.

Runner Dan
Runner Dan

Curious to know how much IL pension money flows out of state.

Greggg
Greggg

Used to go there for gambling entertainment when working assignments in St Louis, Mo... gambling business was supposed to take care of these problems. Well, that didn't work, did it.

themonosynaptic
themonosynaptic

I've warned a couple of my cop friends that they are living in la-la land if they think that voters aren't going to change the rules when they have to choose between a functioning police force or paying retirees to play golf on manipulated pensions.

They tell me about "the state constitution", but this is a head-in-the-sand argument - the state constitution will be amended tout suite when the rich towns also have to forego protection - and for many it is only a matter of time.

My town played hardball with the cops and moved to a sustainable pension plan that is now attracting good cops because it is seen as being realistic and dependable - it took a hard ass mayor, but she stood her ground with all the public unions (and she is a Democrat, just for the record).

I expect that the pensions will be "taxed" for any retiree getting more than what the rest of us get in SS - they won't take it all away, but the people who are getting over $100K/year will see a remarkable level of taxation applied at the local level, as some of the other commentors have already suggested.

Webej
Webej

Defined contribution plans will not work either. If your pension fund is 9% funded, there have obviously been a lot of contributions that were never made even when the financial situation was not as dire as it is now. And the contributions are still far in arrears.

It's not just the unions. The cities should never have made these promises if they had not intention or ability to keep them.

When people decide they still need a fire department to prevent the whole place from burning down, the reforms will likely impact the deserving harder than the undeserving -- not every pensioner is playing golf and taking Florida vacations.

When companies go bankrupt and it comes out they have squandered or disregarded the pension fund, or when municipalities reneg on their pension promises, we should make very sure the actors are the first ones to end up on skid row.

MickLinux
MickLinux

I wonder... if the cities have a budget shortfall, what if they cut the entire tax collections departments to zero? Would that not effect the same as a bankruptcy?

Realist
Realist

The US is a great example for the rest of the world in some areas; for example, technology, creativity, higher education. The rest of the world can learn from observing these successes.

Of course, the US is not perfect and it struggles in some areas; for example, health care costs and coverage, pensions, mass shootings.

Just as the rest of the world should look to the US for how they achieve their successes, the US should look to other countries who demonstrate success in these other areas.

It appears as though Americans are too proud, too blind, or too stupid to look at how other countries do things better.

Regarding pensions, including public pensions, there are many countries who have fully funded public pensions. Perhaps the US should look into how they manage it.

I have mentioned before, that if Mish is going to move, he should move north to Canada. He could live in Niagara Falls Ontario, and drive over the bridges back to the US as often as he wants. He would be able to see a doctor as often as he wishes and pay nothing for any hospital procedure.

The pension of Ontario Health care workers (HOOPP) is 125% funded, Teachers (OTPP) is 100%+ funded, Municipal Employees (OMERS) is 98% funded.

However, I expect many Americans who comment on this blog to continue to complain about what doesn’t work in the US, while simultaneously deriding what works in other countries. The result of that attitude, is to keep suffering, rather than looking for how to improve.

Tawdzilla
Tawdzilla

At what point do the taxpayers get a say in how their money is spent?

KidHorn
KidHorn

Coming to a municipality near you. The government is a living entity and will do whatever is necessary to survive. If it comes down to them vs their constituency, they'll always fight for themselves.

ksdude69
ksdude69

As long as the national resolution isn't attached to my house anymore than it already is im ok with it.

DrDog
DrDog

Its not a national issue because these are state funding problems, not federal.

But I am all for reform. A State wants a bailout, ok. but here is the deal --

  • State degrades to territorial status.
  • Governor is fired.
  • Legislature is fired.
  • Reps and Senators lose voting rights till statehood is reinstated.
  • Statehood is reinstated only once all debts have been paid.

It has to be clear that the cure is worse than the disease. Otherwise States will just run up bills, default and run to the Feds. Rinse and repeating forever.

Realist
Realist

Just read an article in Barrons which ranks the best countries for retirement. The top ten were Iceland, Switzerland, Norway, Ireland, New Zealand, Sweden, Denmark, Canada, Australia, and Luxembourg. The US was 18th.

left blank
left blank

. . corruption on steroids . . how can the American people get back the trillions of stolen taxpayer dollars looted from them over the past nearly 30 years. the govt employee labor unions all across america are racketeering in harmony at the maximum level possible , using a secret sophisticated salary and pension software program . the taxpayer funded govt employee labor unions also make the taxpayer fund the rental/leasing of the software that is in use nationwide and the unions then use the secret software to pay themselves 10 times more than their union contracts legally allow . then each govt employee labor union member is rewarded with a life long taxpayer funded pension which is 10 times greater than it was supposed to be. based on the cooked books .. plus written within the govt union retirement pension contract.. it says.... each govt union member is rewarded with a cost of living raise of 6% every 4 years , after they retire COLA . . . all of this racketeering fraud is funded by you . this scam is taking place all across america and no TV or newspaper reporter will report on the news in any state . . . trillions more taxpayer dollars will be stolen before anyone learns of this nationwide salary and pension racketeering fraud scam . . https://www.youtube.com/watch?v=DB_c5FVjdx8&t=37s