Relative to most other states, Illinois has a disproportionate number of local governments and pension systems. With the state facing population decline and fiscal stress, policymakers are looking at government consolidations as a way of saving money without cutting services.
The Census Bureau estimates that Illinois’ population declined 0.7 percent between 2010 and 2018. Demographers at the University of Virginia project a further three percent decline between 2020 and 2040. The state’s shrinking tax base will be called upon to service over $150 billion in outstanding debt instruments, as well as more than $250 billion in unfunded retiree benefit obligations.
Further tax increases might hasten the outward exodus, so the state’s political leaders are under heightened pressure to “sharpen the pencil” when overseeing government operations. One opportunity to gain efficiency is through consolidation.
As Adam Slade, effective government finance associate at the Chicago Metropolitan Planning Council, told a recent gathering, Illinois has more governments that any other state. Illinois’ 6,963 governments outnumber the 5,147 governments in Texas and 4,425 governments in California – the two largest states by population. Put another way, Illinois has 5.4 governments per 10,000 people. Texas has 2.0 governments per 10,000 California has 1.2 governments per 10,000 people.
Slade, who was speaking to the XBRL US Midwest Municipal Data Forum, noted that Illinois has 31 school districts that have 50 or fewer students. Each of these tiny school districts has to employ administrative personnel despite the very limited amount of administration required by such small contingents of students.
Illinois also has a lot of highly specialized districts rarely seen in other states. For example, Illinois has over half of the nation’s street lighting districts and more than 20 percent of the country’s library districts. In other states, street lighting and libraries are more frequently handled by general purpose governments like cities and counties that can spread administrative costs and expertise across multiple functions.
Aside from extra expense, some of these small governments are subject to less public scrutiny and media oversight— creating even more risk of incompetence and corruption. Recently, for example, the Securities and Exchange Commission sanctioned a bond underwriter for abuses committed when floating a bond issue for the Harvey Library District. Despite carrying a rating of AA, the $6 million Harvey Library District bonds yielded 5.05 percent when issued in 2015—between 1 percent and 2 percent higher than comparable bonds issued around the same time. Insiders quickly flipped the bonds to investors at market yields, pocketing hundreds of thousands of taxpayer dollars.
The Metropolitan Planning Council hopes to facilitate various forms of government integration in the coming years. These measures could range from mergers and annexations, which result in an actual reduction in the number of governments, to information sharing, pooled purchasing and mutual aid. Slade noted that opposition to consolidation comes from residents who take pride in their ultra-local governments, officeholders whose roles might be eliminated and businesses that stand to lose opportunities to sell redundant services.
A sharp reduction in the total number of Illinois governments may not be in the offing, but state action this fall may result in the consolidation of the state’s myriad local pension systems. The Illinois Pension Consolidation Feasibility Task Force recently recommended combining 649 local public safety pension systems into just two: one for suburban and downstate police officers and a second for suburban and downstate firefighters. The Task Force found that, on average, these pension systems each managed only $22 million in assets, with 44 percent managing less than $10 million each.
Centralizing asset management should reduce operating costs and could also produce higher returns, depending on how effective centralized managers prove to be. But the task force’s proposal is not a cure-all. Illinois’ downstate and suburban pension plans are underfunded to the tune of $11.5 billion, a situation that won’t instantly change with consolidation. Indeed, since the task force is recommending some enhancements to benefits for those hired after 2010 (referred to as “Tier 2” employees), the unfunded balance may actually increase. These enhancements may be required to prevent future retirees from becoming Social Security eligible, which could trigger back-payments of Federal Insurance Contributions Act (FICA) taxes by local government employers.
On the positive side, more effective management of pension assets could slow the growth of unfunded liabilities over the long-term, reducing the overall tax burden for the shrinking number of Illinoisans.
Hopefully, Illinois will also seek to consolidate or dissolve the many duplicative governmental units being paid for by taxpayers.