Meeting police and fire pension obligations is perhaps the biggest challenge city governments have had to face in the last decade. Pensions have steadily escalated and now eat up close to 50 percent of many cities’ property tax revenues.
Local pensions funding hit crisis mode a few years ago when the state changed the rules for determining how cities must meet its obligations. Cities are now mandated to fund the pensions at a 90 percent level by 2040. The state reserves the right to withhold local government distributive funds from municipalities that don’t adequately fund pensions.
Actuaries have become increasingly important in the city budgeting process, as they crunch the numbers and give city leaders funding recommendations for staying on track. Cities now usually receive at least two sets of numbers – one version to hit the 90 percent target and another more ambitious plan to for 100 percent funding.
Deciding between the recommendations is becoming an increasingly divisive issue in some cities. While paying off unfunded pension liability sooner saves taxpayers a lot of interest in the long run, property owners are screaming for relief. Sterling, for instance, has taken an aggressive approach, striving to pay 100 percent by 2036. City Manager Scott Shumard has said it’s time to stop passing on past debts to the next generation.
Sterling Alderman Jim Wise, however, pointed out that the city’s accelerated funding schedule has cost property owners an additional $2.8 million in taxes. In 2015, Sterling approved a nearly 19 percent increase in its share of residents’ property taxes.
Dixon took an important step this week to be more proactive with its pensions funding. On Monday, the City Council approved its 2020 fiscal year budget which includes an additional
$3 million contribution to the fire pension fund.
One of the biggest problems with the pension funds is that there are so many of them. They are locally run and don’t have the scale needed to produce consistently healthy investment returns.
By making the extra contribution to its fire fund, Dixon will hit the $10 million mark, which opens the door to more investment options that could bring higher returns.
Like many small cities, Dixon has a long list of infrastructure projects it wants to expedite to entice development. City leaders hope that by infusing more money into the fire fund now, it will soon free up more money for capital projects.
The plan calls for $1.5 million to come from the Rita Crundwell Recovery Fund, $1 million from capital reserves, $430,000 from the Emergency Vehicle Fund, and $70,000 from a special fire fund.
Dixon finds itself in a different situation than cities in Whiteside County. The city has its hands tied by tax caps set up under the Property Tax Limitation Law. The city can still ask voters for a tax levy increase to help pay for pensions, but officials are doubtful that a referendum would pass.
The city can try to negotiate with the unions for higher employee contribution levels, but it’s unlikely the collective bargaining process will yield any relief.
The state has control over a flawed process for funding local public safety pensions. Cities are wise to take matters into their own hands rather than wait for reforms from Springfield that might never come.