(Bloomberg) -- The pension-funding crisis undermining thestability of Illinois and Chicago is rippling through hundreds ofsmaller governments, squeezing budgets as officials prop upteetering police and fire retirement funds.

The eastern Illinois border city of Danville has reduced itsfirefighter ranks by 27 percent in five years to lower retirementcosts. The tiny Chicago suburb of Stone Park sold $2 million inbonds last year to bolster the police pension, which had just sixcents for every dollar owed retirees.

“Most communities in this state are in no position tocontinuously meet the pension requirements,” saidTom Weisner, mayor of Aurora, the state’s second-largest city, witha population of almost 200,000.

The squeeze comes from about 650 police and fire pension fundsand is largely overlooked in the deepening Illinois and Chicagopension crises. The state is saddled with $111 billion in unfundedliabilities. Chicago and its public school system, with a combinedshortfall of almost $30 billion, face the prospect ofbankruptcy.

Half of local retirement systems are less than 60 percentfunded, according to a May report from a commission created by thelegislature to monitor Illinois’s long-term debt position. Eventhose in better financial condition share a trait with weakerpeers: mounting pressure from state-enacted benefit increases,resulting in higher taxes and service cuts to cover the costs of11,000 retirees and 22,000 active public-safety employees.

“I firmly believe our police and firefighters should enjoy agood pension, certainly at a higher level than mine,” Weisner said,“but they are reaching well beyond the level ofsustainability.”

Ever Deeper

Benefit increases have outpaced investment and taxpayer revenueto pay for them. Some towns and cities failed to make requiredpayments during the past two decades, just as the state and Chicagodid. Pension investment returns plummeted during the recession,deepening the hole.

Average funding for police and fire retirement plans was about56 percent in 2012, the most recent year available. In 1991, theywere at 75 percent.

Danville Mayor Scott Eisenhauer said his city of 32,000 isrunning out of options. Sixty percent of the property tax goes topay pension obligations, he said. The firefighter system was 24percent funded in 2013, while the police fund was at 36percent.

“We’re losing ground,” Eisenhauer said, adding that residentsmay move four miles (six kilometers) to Indiana to avoid theobligation.

“We may not drive them out with higher property-tax rates, butwe may with decreased services,” Eisenhauer said.

The challenge was compounded in May when the Illinois SupremeCourt overturned a 2013 law that cut pension benefits, saying suchpayments to public employees are sacrosanct. While the decisionapplied solely to state plans, the ruling constrained allmunicipalities.

Chicago enacted a benefit-cutting law last year affecting two ofits pension systems. A judge declared it illegal, citing theIllinois constitution. The city is appealing.

Pension liabilities are at the root of Illinois’s lack of abudget almost two months into the fiscal year. As more money goesto pay for underfunded pensions, deficits mount -- $6.2 billionthis year. Republican Governor Bruce Rauner and Democraticlegislative leaders are at an impasse over how to close thegap.

Rauner has called for letting municipalities file for Chapter 9bankruptcy to relieve stress. While some mayors support that, abill that would have ended the requirement that the state authorizea filing stalled in the legislature.

Gathering Together

The situation has raised questions about why there should be 650pensions -- some covering fewer than 10 retirees.

“For every municipality to have its own police and fire pensionsystem makes no policy or economic sense,” said Laurence Msall,president of the Civic Federation, a Chicago research organizationthat specializes in government finance.

Msall and others argue that they should be merged into one ortwo systems, eliminating the duplication of administrative costsand having them run by professionals instead of retirees. Oneproposal calls for having investments handled by the IllinoisMunicipal Retirement Fund, an oddity in the state -- it’s 93percent funded.

The proliferation of pensions reflects Illinois’s abundance ofgovernments -- almost 7,000 taxing bodies, the most among thestates. They run the gamut from mosquito-abatement districts toeconomic development authorities.

“There’s not an easy fix,” said Representative Elaine Nekritz,who chairs the House Personnel and Pensions Committee.“Consolidating the systems is not a panacea.”

Weisner said Aurora has made its required pension payment everyyear since he became mayor in 2005, yet costs still squeezeessential services.

“Cities like Aurora are now faced with the difficulty of whetherwe can afford to fill a police or fire vacancy based on whether wecan afford to hire a new employee,” he said.

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