Thoughts on the Looming Pension Problems Facing Chicago, Cook County and Illinois

Abstract

Recent increases in Cook County’s property taxes have reignited longstanding political controversies about public-sector expenditures of the City of Chicago, Cook County and the State of Illinois. These fiscal problems leave Illinois with among the worst fiscal health of any of the fifty states. Much of the state’s poor fiscal condition is attributable to the unfunded pension liabilities of its various governmental entities. These liabilities have an adverse impact on property values (due to increased property taxes, uncertainty about how these unfunded pension liabilities are to be ultimately resolved, and the crowding out of public-sector services). Partly as a result of these harmful forces, the Chicago area has seen the lowest home appreciation rate of any major metropolitan area in the country. Importantly, these fiscal problems are expected to worsen, as the gap between the pension plans’ assets and liabilities is expected to widen considerably over the coming decades. Moreover, it is challenging to raise taxes in an environment where Illinois’ overall taxes are the third-highest in the country (and, specifically, its property taxes are the second-highest in the country and its sales taxes are the seventh-highest in the country). Without a comprehensive plan to arrest these runaway pension liabilities, the economic engine that is the Chicago metropolitan area will slowly falter. Now that the Democrats control the governorship as well as both legislative bodies, it would seem an appropriate time to consider a “grand bargain.” I propose three bold items: a) all new public-sector employees are to be enrolled in defined-contribution pension plans, b) all new significant sources of revenue, cost-cutting mechanisms and the monetization of the state’s assets are to be dedicated to the pay-down of unfunded pension benefits, and c) a constitutional amendment is needed to moderately reduce the future benefits (of the current defined-benefit pension plans) of the existing public-sector employees (and their beneficiaries).

Keywords: property taxes, unfunded pension liabilities

JEL Classification: H71, H73, H75, R23, R38, R50