Rising Costs for Public Pensions Drive Up Tax Bills

Imagine a state that puts the pensions of its government employees ahead of just about everything else it does. Would you choose to live there? And if you did live there, how long could you afford to stay?

These are real life questions that were faced by people who lived in cities like Detroit and Stockton. In these cities, public officials gave very generous pensions and benefits to government employees in return for their political support. So generous, they contributed to their bankruptcies in a very non-virtuous cycle.

Here’s how it worked. To pay for the generous public employee benefits, they raised taxes. Those higher taxes drove away businesses and residents, hurting their tax collections. To keep government employees from moving away, they gave them more generous benefits. That created the need to raise taxes more, which starts the cycle over again. That process kept going until they couldn’t keep the cycle going any longer. It stopped the only way it could when they went bankrupt.

But the problem didn’t stop at these cities’ limits. In some states, like California, Kentucky and Illinois, the problems with public employee pensions is growing bigger. So are their state and local taxes because of it.

One Household’s Experience in Illinois

Amy Korte of Illinois Policy describes how that state’s rising costs for providing generous retirement packages to government employees is hurting one household:

Patricia Hill grew up in Chicago’s Hyde Park neighborhood dreaming of one day owning a home. She and her husband accomplished that dream in 2003 when they moved to the suburb of Matteson to raise their two daughters. They bought a two-story home in a quiet neighborhood for $315,000. Her property taxes were $7,800 for 2004.

But Hill’s home is now worth less than she paid for it back in ’03. Meanwhile, her property taxes have done anything but decline. She now pays nearly $10,000 in property taxes.

“Everyone is in shock when I tell them the property taxes. They say it must be an error,” Patricia said.

Patricia is not alone. In the 1990s, Illinois property tax bills were around the national average. But in the two decades from 1999 to 2019, we’ve seen a massive 65% increase in residential property taxes, adjusted for inflation. That increase is what drove Illinois to having one of the highest tax burdens in the nation.

Every Household in Illinois

Korte describes how the problems of Patricia Hill’s household are really shared by all Illinois households:

The source of Patricia’s – and her fellow Illinoisans’ – property tax pains? Public employee pensions.

More than 70% of Patricia’s property tax bill goes to the school district. While school districts account for a significant portion of property tax bills in localities across the United States, school district budgets across Chicago and Illinois are getting devoured by underwater pension systems.

While the state is responsible for paying employer pension costs for teachers outside of Chicago, rising pension obligations mean more state dollars are spent on pensions, leaving more classroom costs for school districts to fund through property taxes.

The Teachers’ Retirement System, the plan that oversees retirement benefits for teachers and other educational workers outside of Chicago, is funded at 40% as of 2020. This means that for every $1 of promised benefits, the state has set aside only 40 cents to fund that promise.

Because the cost of these generous retirement packages has grown faster than existing government revenues can sustain, property taxes continue to climb.

That’s the non-virtuous cycle at work, throughout the entire state of Illinois. It will keep going until Illinois’ politicians discover they cannot keep the cycle going any longer. Then it will stop and that’s when things will really get interesting, because state governments cannot declare bankruptcy.

What happens next is anybody’s guess!

Craig Eyermann is a Research Fellow at the Independent Institute.
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