(Bloomberg) — The pension-funding crisis undermining the stability of Illinois and Chicago is rippling through hundreds of smaller governments, squeezing budgets as officials prop up teetering police and fire retirement funds.
The eastern Illinois border city of Danville has reduced its firefighter ranks by 27 percent in five years to lower retirement costs. The tiny Chicago suburb of Stone Park sold $2 million in bonds last year to bolster the police pension, which had just six cents for every dollar owed retirees.
“Most communities in this state are in no position to continuously meet the pension requirements,” said Tom Weisner, mayor of Aurora, the state’s second-largest city, with a population of almost 200,000.
The squeeze comes from about 650 police and fire pension funds and is largely overlooked in the deepening Illinois and Chicago pension crises. The state is saddled with $111 billion in unfunded liabilities. Chicago and its public school system, with a combined shortfall of almost $30 billion, face the prospect of bankruptcy.
Half of local retirement systems are less than 60 percent funded, according to a May report from a commission created by the legislature to monitor Illinois’s long-term debt position. Even those in better financial condition share a trait with weaker peers: mounting pressure from state-enacted benefit increases, resulting in higher taxes and service cuts to cover the costs of 11,000 retirees and 22,000 active public-safety employees.
“I firmly believe our police and firefighters should enjoy a good pension, certainly at a higher level than mine,” Weisner said, “but they are reaching well beyond the level of sustainability.”
Benefit increases have outpaced investment and taxpayer revenue to pay for them. Some towns and cities failed to make required payments during the past two decades, just as the state and Chicago did. Pension investment returns plummeted during the recession, deepening the hole.
Average funding for police and fire retirement plans was about 56 percent in 2012, the most recent year available. In 1991, they were at 75 percent.
Danville Mayor Scott Eisenhauer said his city of 32,000 is running out of options. Sixty percent of the property tax goes to pay pension obligations, he said. The firefighter system was 24 percent funded in 2013, while the police fund was at 36 percent.
“We’re losing ground,” Eisenhauer said, adding that residents may move four miles (six kilometers) to Indiana to avoid the obligation. “We may not drive them out with higher property-tax rates, but we may with decreased services,” Eisenhauer said.
The challenge was compounded in May when the Illinois Supreme Court overturned a 2013 law that cut pension benefits, saying such payments to public employees are sacrosanct. While the decision applied solely to state plans, the ruling constrained all municipalities.