New pensions law puts Chicago in a bind
5 min read
Bloomberg News
Illinois Gov. JB Pritzker on Friday signed pension legislation that will put Chicago on the hook for an additional $60 million in its fiscal 2026 budget, rising to $750 million in 2055, for a total of $11 billion over the next 30 years.
The city already faces a $1.1 billion budget gap in 2026.
The legislation,
The law raises the salary cap for Tier 2, a category covering workers hired since 2010 that originally aimed to bring down the costs of public pensions, which are constitutionally protected in Illinois.
The legislation drew opposition from Illinois Policy, a Chicago-based think tank with libertarian leanings, and its affiliate, the Chicago Policy Center, as well as a coalition of Chicago-based watchdog groups.
In a
“This adds enormous legacy costs to the city budget at the worst possible time,” Austin Berg, executive director of the Chicago Policy Center, told The Bond Buyer.
“The city is already facing a billion-dollar deficit; our police and fire pension funds are already the worst-funded in the nation; and this bill makes those retirements even more insecure, dropping them from 25% funded to 18% funded,” he said. “Also, it’s just dropping this enormous cost onto taxpayers.”
Chicago Mayor Brandon Johnson said
“Without progressive revenue, there is not a pathway that allows us to maintain these obligations,” he said.
“I think even with higher revenues, it would be very, very difficult to bear … because of this backloaded cost structure,” the Chicago Policy Center’s Berg said. “And the mayor is also saying that at a time when he is demanding billions of dollars more in state revenue for the (Chicago Transit Authority) and for Chicago Public Schools,” which will be his priorities.
The city’s pension funds have about $36 billion in net liabilities; the law would increase that by almost a third.
At his press conference, Pritzker said, while city finances were a concern, “these are our policemen, these are our first responders, and we want to make sure that they are well taken care of.”
Pritzker spokesman Alex Gough said the governor’s office had nothing to add to comments from the press conference.
Chicago’s finance team did not respond to a request for comment by press time.
“Of the bill’s provisions, it’s really the Tier 2 salary cap escalator that’s the primary cost driver,” said Linda Vanderperre, managing director at KBRA.
“Obviously, on the surface of it, the increased pension contribution costs … don’t sound good for the city,” she said. “But the alternative … could also contribute to incremental budget pressure.”
S&P Global Ratings Director Scott Nees told The Bond Buyer “the immediate, near-term fiscal impact … isn’t huge,” given the city’s roughly $6 billion corporate fund budget — “but you have to keep in mind that that would be added to an already $1.1 billion-plus structural budget deficit,” he said.
The law wouldn’t impact S&P’s rating on the city, Nees said prior to the signing. “We’re really homed in on this FY2026 budget process, and we’re looking for” how the city will narrow “the structural budget gap, both from a revenue side as well as from a spending side.”
Nees noted there have been several proposals to address Tier 2 concerns in recent years, some more generous than others.
Questions had been raised about whether Tier 2 had drifted out of compliance with the Internal Revenue Service’s
The Tier 2 salary cap had been growing at only half of the consumer price index since 2011, while the Social Security wage base was growing at full CPI, according to Vanderperre.
“The actuaries identified back in 2023 that the police and fire pension funds would dip below the Social Security wage base beginning in 2026,” she said. “So that was my understanding as to why this was all even being considered.”
Nees said a more minimalist fix would merely bring Tier 2 pension benefits up to the minimum standard for the Safe Harbor test.
The “more maximalist fixes” would add significantly to the city or state’s pension burden, he said. HB 3657’s costs would be “on the higher side” of that spectrum, Nees added.
Berg insisted this legislation not be confused with a fix for Safe Harbor concerns.
“The problem is that proponents have been conflating the two,” he said. “Illinois lawmakers have not shown that Tier 2 violates Safe Harbor. They’ve not produced any evidence that that’s the case. Second, the IRS has never enforced a violation of that. Third, even if compliance is needed, if it was found to be in violation, this bill would go far beyond what’s necessary to comply.”
Berg pointed to comments by Illinois Comptroller Susana Mendoza in a
“When we take what is already a woefully underfunded pension system … (and take it) to an 18% funding level, what that means … is that it might go completely insolvent,” she said. “I don’t know how you recover from an 18% funding level.”
Berg added, “This was written entirely at the behest of unions … with no regard for whether Chicago can pay for this.”
Chicago’s general obligation bonds are rated A-minus with a negative outlook by Fitch Ratings and KBRA. S&P assigns a BBB rating with a stable outlook. Moody’s Ratings rates the city Baa3 with a positive outlook.
“The actuaries will need to determine whether the fix fully restores compliance with Safe Harbor, or if additional Tier 2 adjustments may be needed,” Vanderperre said of the law. “The city will likely need an IRS opinion about that.
“It’s critical to get this Tier 2 fix correct,” she added. “Because once pension benefits are provided, they are protected under the state constitution and can’t be reduced.”
