The budget problem is dire.
After going two years without a budget, there was a palpable sense of relief throughout the state when the Legislature passed a budget this summer. The legislators and our Governor had failed to pass a budget all of that time even though it was causing the state’s credit rating to be greatly downgraded. This is important because the State carries a lot of debt, and when the credit ratings go down the interest rates charged to the State go up. That means more of our budget is being paid simply to pay interest as opposed to providing services to those in need. As a practical matter it meant that the State was unable to pay many of its obligations, and numerous agencies providing social services for all of our citizens that need them (the sick, disabled, and mentally ill, to name just a few) ran out of money and simply had to shut their doors. This represents a failure to provide basic government services.
The more optimistic amongst us (and that is usually me) want to believe that things will be fine now that the budget deal is in place. But unfortunately that is simply not true. Moody’s was not bluffing when they said that they were carefully considering rating IL at junk bond status even after the deal. This is because IL has a severe money problem; namely that we have a ton of debt. One facet of this problem was the approximately 15 billion dollars in unpaid current obligations that were still outstanding when the budget deal was made. That’s a significant amount when keeping in mind that our annual state revenues are about 35 billion. Some of it was paid off, some of it is being financed with bonds (still leaving long term debt) and some just has not been addressed yet. Those creditors just have to wait to get paid (while charging us a high interest rate). As bad as the above may seem, it is minor compared to the big problem, that being our unfunded debt obligations. In particular, the elephant in the room is the unfunded state pension liabilities.
Current State Pension Liability
IL presently pays about 26% of every dollar collected (from all state sources, including income taxes, sales taxes, etc.) towards its current pension obligation. This is a very high amount as in some states the payment is in the vicinity of 5% of revenues. This is not salaries, just pensions, and as a result after the payments for salaries and pensions there is much less available for the other major government functions (such as education, infrastructure, the environment, and taking care of our elderly, sick, disabled and mentally ill).
Defined Pension System
The State of Illinois acts like corporations used to after WWII in that it pays its employees a defined benefit pension. It is a very important part of the total compensation package because unlike most other workers in the US, they are for the most part not entitled to collect social security. Defined benefit means that upon retirement the employee gets a monthly pension payment based upon a formula, and it is not dependent on market performance. In contrast, today, most businesses don’t pay defined benefit pensions, they instead make defined contributions and then it is up to the employee to invest it as they like in their 401(k) fund. The amount of the ultimate payment is not guaranteed as it depends on how the employee chooses to invest it and the returns on those investments.
Unfunded Pension Liability
Since the State was obligated to pay out pensions to employees upon retirement, it was incumbent upon the State to properly save for this obligation by “funding” the pensions. Of course, our problem today is that the State has failed badly at this obligation. The watershed moment in our history with this problem occurred in 1994. At that time it was estimated that the State had an unfunded pension liability of about 15 billion dollars (those were the days my friends) which was thought to be quite large. At that time a law was passed that is now known as the “Edgar Ramp”. This is because Jim Edgar (a Republican) was the Governor at the time, but both political parties were involved in passing it. The law set up a 50 year plan to bring the pension system up to 90% solvency. The payments started out very low and then increased like an upward ramp for the next fifty years. The problem was that the payments were so low during the first 15 years (like a negatively amortizing loan) that the amount of the unfunded liability was actually increasing. Not a good plan! But over time the plan got even worse for several reasons: (1) There were some very unrealistic amortizing assumptions made about how quickly the state’s investments would grow that have subsequently been corrected (though it is still assuming growth on pension assets at about 7% per year which is pretty bold/risky) (2) the investments performed very badly during the recession; (3) in two years during the Blagojevich administration he took pension holidays (while this sounds very festive it means no payments were made at all in those years to the pension funds, resulting in an even steeper ramp).
The Amount of the Unfunded Pension Liability
The State of IL’s Commission on Government Forecasting and Accountability has published annually in recent years a report on the financial condition of the retirement systems. According to the most recent publication in June of 2016, they estimated the unfunded pension liability at almost 130 billion dollars. Moody’s believes that it is actually in the vicinity of 250 billion. Some analysts think it should be considered to be higher than that because they disagree with the assumed growth rate. In any event, these are staggering amounts. If one were to use the Moody’s figure that is over $40,000 for each wage earner in IL. Moreover, due to the structure of the ramp, even the State of IL Commission I mentioned estimates that within the next decade the amount that we will have to pay each year towards the pension obligation will double. This will mean that if income is not increased that over 50% of our budget will be going solely to pensions. Everyone else is really going to suffer (again think of education for our children and all of the social services that a humane government must provide).
The Pension Debt is Inter-Generational Theft
By not adequately addressing these pensions for so long we have effectively stolen from our children. As it stands now, they will be burdened by high taxes and will get the benefit of only minimal levels of government services.
Payment of the Pension Debt is Our Obligation
We are obligated to make good on this debt and I have no patience for those suggesting that we don’t. We have a moral obligation because as a State we entered into a contract with these public service unions promising to make payments, and it would be unethical to not make them. While we can now question whether these obligations were made wisely, we cannot question their validity. We can’t forget that these are obligations that we made to hardworking people that have served our state. They certainly did nothing wrong and deserve every penny of their pensions. Secondly, the obligation to pay pensions is specifically secured in our state constitution. Furthermore, when the Legislature passed a bill in 2013 which attempted to affect future benefits for current workers (but not the pension benefits they had already earned) the IL Supreme Court declared it unconstitutional as well.
We Must Pay Down On This Obligation Now
The amount of the debt is obviously way too large to simply pay off right now (even Bruce Rauner and his friends could not do it), but we must start to address it in a more aggressive fashion. If we can increase the amounts going into the pension funding each year, above and beyond those required by the Edgar Ramp, then we can flatten the shape of that ramp so that it will not be such a burden for our children. I think that is the only “adult” path to take, and I am absolutely committed to paying substantially more each year towards this debt in order to protect the future of the coming generations. This will certainly require some pain on our parts and it will require both the reduction of expense and increases in revenues. I have good ideas on both fronts.
Progressive Income Tax
IL levies a flat income tax at a current rate of 4.95%. 34 states have a progressive income tax system, meaning that people with higher income pay at a higher tax rate. Ken Griffin (one of Gov Rauner’s major supporters) purportedly earns income of about 70 million per year. It would seem that he could reasonably be expected to pay at a higher rate! Even the Chicago Tribune has supported the idea. One proposal has been that it should increase to 8.5% for incomes over $500,000 per year, which seems reasonable to me. The major problem, of course, is that our state constitution requires the flat tax rate. In order to amend the constitution to allow the progressive income tax it must first pass in the State Legislature, and then be submitted to the electorate for their approval at an election. I will work tirelessly to get it passed in Springfield and then at the ballot box. It will undoubtedly be a struggle as the Koch Brothers and their ilk who will undoubtedly mobilize against it.
According to US News and World Report the average state in the US levies a tax on 56 types of services whereas IL taxes only 17 types of services. The service tax is at the rate of 6.25% which is the state sales tax rate. There have been recent proposals in Springfield to extend it to other sectors of the economy such as storage spaces, pest control, landscaping, and some types of personal care, etc, but it has been defeated so far. I will work to not only pass these services taxes, but to extend them to others area of the economy as well. For example, I would even support a tax on legal fees. However, I would be willing to consider taxing services at a lower rated.
IL is one of only three states that have an income tax, but then completely exclude all retirement benefits. This started in 1984 and it is costly. There is no tax on social security, 401k’s, or distributions from IRA’s, for example. I would support an income tax on these amounts so long as it is just a tax that is above a certain minimum amount, such as a marginal tax only on retirement income that exceeds $75,000 per year. I have read that such a tax could raise approximately 1.5 billion per year for IL. I would agree to this tax only the condition that it be specifically earmarked to be paid directly to the state pension funds, so that we can decrease the pension ramp that will be so painful for our state and our children in the near future.
Future State Salaries and Pensions
There are about 65,000 people working for the State of IL, which amounts to about one half of one percent of our population. The average salary is about $62,000 per year in 2016. Governor Rauner may be wrong when he says that is the highest average state salary in the nation when adjusting for cost of living, but it is certainly in the top five or six. Of course, when other costs of employment are added in, and particularly the value of the pension plans that are being provided, then the cost for employment is much higher. The state of IL needs to keep these costs under control. We would all love to pay everyone a really large salary, but we need to remember that we have to pay that bill. When we bargain with our public service unions it is our obligation to represent all of the families in IL, and not just the one half of one percent that are members of those organizations. We must be fair, but keep in mind that any additional staffing or salary and benefit increases are paid for by all of us and they ultimately result in less to be spent on the disadvantaged and the other issues that we all care about. I want to stress that I am not in any way anti-union, as I believe that labor should organize where it is appropriate for them (I support labor in the sense that I agree with the laws in IL requiring all employees at a unionized company to pay “fair share” fees, but the portion of dues going into politics, which Is of course consistent with my view that unions just like corporations and other entities should not be making political contributions anyway). I also want to stress that I favor the $15 minimum wage that was recently vetoed by Governor Rauner. That way our government is advocating for all of the workers in IL and not just the ones in unions.
Consolidation of Governments
Within our state we have nearly 7,000 separate governments, a staggering number that is by far the largest number in the nation. That is almost 7,000 separate entities that all have the power to tax, and that many entities that hire personnel for which we pay salaries and pensions. On a normal real estate tax bill at a particular location in IL you will find that taxes are being paid to about 8 to 10 different entities, and sometimes more than that. How could that be? We still have township governments (over 1,400) that date back to the creation of IL, there are over 800 school districts (including one school districts still), and myriad of special service governments such as for libraries, parks, and pest abatement, etc. The fact that there is a duplication of service and expense is clear. There has been a movement afoot for some time to force consolidation of many of these entities, but as one can imagine, there are well-connected officials and administrators that are quite opposed to this. I support the efforts to streamline local governments as spearheaded by Transform Illinois.