RHODE ISLAND CITY OFFERS DIRE WARNING TO ILLINOIS MUNICIPALITIES STRUGGLING WITH PENSION DEBT

In 2010, Central Falls, Rhode Island, was in crisis.

The city of 19,000 faced $80 million in unfunded pension and retiree health care debt with only $16 million in annual revenue, according to Reuters. City leaders had mismanaged finances, racking up multimillion-dollar budget deficits, and the city’s cash had been divided among 54 accounts – some of which had been opened decades before and had since been forgotten – according to a 2013 report by the Pew Charitable Trusts.

It’s a story that will be familiar to residents of Harvey, Illinois, as the city struggles to pay for its pensions while maintaining basic services. Central Falls ended up cutting its pension debt in Chapter 9 bankruptcy, but that option is not available to Harvey, as Illinois generally does not authorize municipalities to file for federal bankruptcy protection. This could leave cash-strapped Harvey with no choice but to slash services even further or default on its pension payments.

Much like Harvey, Central Falls is a lower-income community just miles away from a larger city. In 2010, the median household income was less than $34,400, and a quarter of its population was below the poverty line, according to data from the U.S. Census Bureau. Its $80 million in unfunded pension and retiree health care liabilities amounted to five times its annual revenues.

Given Central Falls’ shaky finances, the state intervened, and Rhode Island officials met with the city’s retirees to ask them to voluntarily accept a cut to their retirement benefits, the New York Times reported. Workers rejected the plan.

In the end, Central Falls had to file for Chapter 9 bankruptcy, and while residents saw their taxes hiked, Central Falls pensioners saw their benefits cut by up to 55 percent. The severity of this reduction was partly due to a Rhode Island law ensuring that bondholders were paid first. But the level of pension debt in Central Falls meant those obligations were likely never going to come out of bankruptcy completely untouched.

If lawmakers refuse to enact reforms to Illinois’ broken state and local pension systems, government employees in Harvey – and those in many other municipalities – could ultimately see their retirement benefits severely reduced as well.

The conditions are strikingly similar: With a population of 25,000, Harvey’s median income is just $22,000, and the median home value is under $73,000, according to the U.S. Census Bureau. The struggling city owes $87.3 million in pension debt, according to a Moody’s Investors Service calculation – 3.6 times its annual operating revenue. And the city’s property owners are already overburdened, with residential property taxes amounting to 20 percent of the median income as of 2015.1

After failing to make required police and fire pension payments for more than a decade, in 2017 Harvey was ordered by a state appellate court to pay its pension costs. The city had to lay off approximately 40 members of its police and fire departments in April, according to a report by the Daily Southtown, when the Illinois comptroller garnished Harvey’s revenues from the state to ensure pension payments were made.

Unless Harvey finds a way to reform its pensions, it will find itself like Central Falls, facing fiscal collapse. And while Harvey is the state’s most severe case, it’s not the only city in trouble. Of Illinois’ 650 downstate public safety pension funds, nearly 200 are less than 50 percent funded.

The Illinois Supreme Court’s interpretation of the Illinois Constitution’s pension protection clause means cities cannot make adjustments even to unearned pension benefits of current retirees or workers. Without this ability to rein in unaffordable benefits, municipalities such as Harvey will need Chapter 9 bankruptcy to reorganize their pension debt to avoid eliminating crucial public services. While Harvey is prevented by the state constitution from diminishing pension benefits, federal bankruptcy courts are not.

Although painful, bankruptcy would give struggling Illinois municipalities a way out of this mess.

In Central Falls, residents shouldered property tax increases, local government employees lost their jobs and pensioners saw benefit cuts. But after starting the bankruptcy process in 2011, Central Falls saw a $1.7 million budget surplus by 2014.

Today, Central Falls looks to be on the upswing. The city passed its first budget independent of state oversight in 2017. And it passed its first property tax cut in a decade the year before. Central Falls is making its full annual required contribution to pensions, and its credit rating has improved to a level where the mayor is considering issuing bonds to reopen a community center that had to be shuttered. Central Falls even started a rainy day fund in the case of another economic downturn. Much of this is because the city had the opportunity for a fresh start.

Meanwhile, Illinois municipalities cannot declare bankruptcy without state authorization. And until the state gives that authorization or allows the adjustment of pension benefits, municipalities will be left to drown in pension debt without a lifeline.

Illinois cities shouldn’t have to go through bankruptcy in order to right-size their budgets. But without pension reform, that may be the only other option.

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