The severely underfunded Chicago city worker pension fund suffered a recent blow when the Illinois Supreme Court refused to overrule a lower court’s decisions (subscription required) which held that the city’s pension reform was unconstitutional. Though short term, the city benefits because it will not have to increase payments into the pension fund, long term questions remain.
Chicago had been able to negotiate a plan (subscription required) with city workers to increase their contributions by 2.5% over five years, raise retirement age and limit cost of living increases. Some members of the union disagreed and filed suit. The court held that the plan violated the state constitutional ban on diminishing pension benefits but would have been legal if workers were offered a choice. In a sign of protest, teachers are planning a strike April 1 although technically they are not allowed to strike until the summer.
The Chicago police and fire fighter’s pensions were funded by an almost $600 million increase in property taxes. The Illinois governor is crafting a plan which would allow state workers to choose be capping pension benefits and collecting more cost of living increases.
The Chicago pension crisis is emblematic of the drama being played out in major states and municipalities with New Jersey, California and Rhode Island facing the same issues. In fact, some experts believe that the $5.6 trillion state and municipal pension plans are underfunded by almost $4 trillion – a Stanford University professor has created a California pension tracker estimating that each state household would have to pay $75,000 to fund all state and local pensions which is estimated to be underfunded by $1 trillion.
The underfunded pension plan was one of the major reasons that Detroit filed for bankruptcy with the judge ruling that, state constitutional bans notwithstanding, the city could limit pension benefits.
Private companies have run from pension plans long ago moving to 401ks to avoid the underfunded issue with some airlines and car companies using bankruptcy to rid themselves of DB liabilities. It’s hard to imagine that Chicago will file for bankruptcy but they face very difficult decisions: raise taxes, lower city services or limit pension plans. Europe is feeling the same pinch.
