Illinois' Revenue and Pension Debt Problems (a Reiteration)

·         The state’s revenue problem and pension debt need to become the focus and conversation in the upcoming legislative sessions and in the media;

·         According to the National Association of State Retirement Administrators, policymakers must “keep in mind that state and local pensions accumulate and pay out assets over decades. They have an extended investment horizon.”  Therefore, the focus should be on structural tax reform and not pension reform, where public employees are victimized once again and the state’s debt is not resolved;

·         There needs to be a modernization of state and local budgets and their revenue systems. “The structural problems that have built up over time in these systems need to be addressed” (The Center on Budget and Policy Priorities);

·         “[Moreover,] at the core of the budget crisis facing [Illinois] is [its] regressive state tax structure… that is, low-and-middle-income families pay a greater share of their income in taxes than the wealthy…  [A regressive tax] disproportionately impacts low-income people because, unlike the wealthy, [low-income people] are forced to spend a majority of their income purchasing basic needs that are subject to sales taxes” (United for a Fair Economy);

·         “Since the rich are able to save a much larger share of their incomes than middle-income families – and since the poor [can] rarely save at all – the taxes are inherently regressive” (The Institute on Taxation and Economic Policy, ITEP). Illinois income tax uses a single-rate structure that results in low-income wage earners paying more taxes than the wealthy. Illinois is among 10 states in the nation with the highest taxes paid by its poorest citizens at 13 percent (ITEP);

·         Shifting the state’s “normal costs” for the public pension systems to school districts is just another irresponsible victimization of Illinois citizens: “Property tax bases would not be sufficient to absorb any shift in the employer normal cost for teacher pensions… School districts are demographically and financially varied, and it would be difficult to impose a uniform normal cost shift on them… Illinois ranks last in terms of state spending on K-12 education, and school districts are already relying heavily on local property taxes… While shifting the state’s normal cost obligations onto school districts may provide some relief to the state’s budget, it will not mitigate these financial obligations and will instead push them onto school districts that, on average, already derive the majority of their revenue from local sources” (The Center for Tax and Budget Accountability, CTBA, March 2012);

·         Illinois has a structural revenue problem. The Illinois citizenry has been brainwashed to believe (by some policymakers, the Civic Federation, and the Civic Committee of the Commercial Club of Chicago/Illinois Is Broke) that the public pension systems are contributing factors to the state’s deficits. The public pension systems are not the cause of the state’s budget deficits; 

·         Address the pension debt problem. The current “Pension Ramp” does not work for the five public pension systems. The “Pension Ramp” entails larger payments today as a result of the 1995 funding law – Public Act 88-593 – to pay the pensions systems what the state owes; 

·         According to Amanda Kass, Research and Policy Specialist for Pensions and Local Government of the Center for Tax and Budget Accountability, (April 2012): “The issue is that Illinois lawmakers designed a system – the way the employer cost is calculated (what the state pays) – [that is] inconsistent with rules set by the Government Accounting Standards Board (the rules are non-binding and are for reporting; public retirement systems can fund themselves however they so choose). The way GASB specifies that systems should be funded is generally referred to as the ARC (annual required contribution);

·         “According to GASB, the employer’s ARC should be the normal cost (which is calculated using the cost method) plus an amount to amortize an unfunded liability over 30 years. The 30-year time period is an open system; [in other words,] those 30 years don’t count down. In systems in which there is no unfunded liability, the employer’s ARC would just be the normal cost. In Illinois, what the state has historically paid was less than the employer’s ARC (as calculated according to GASB rules). Then there were years like 2006 and 2007 in which lawmakers passed legislation that lowered the contributions for those years to an amount that was below the ‘Pension Ramp’ (those amounts were already less than the employer’s ARC).  In addition to a revenue problem, the ‘Pension Ramp’ was designed in such a way that it’s unfeasible. Even if Illinois’ revenue issue was addressed, the ‘Pension Ramp’ would still likely be an issue.”

Solutions

·         To address the pension debt problem caused by policymakers' theft and irresponsibility, there needs to be a required annual payment from the state to the pension systems; the debt needs to be amortized for a longer frame of time (a flat payment) just like a home loan that is amortized; though the initial payment will be more painful in the beginning, over the long term it will become  a reduced cost and a smaller percentage of the overall Illinois budget as it is paid off throughout the years;

·         To address the revenue problem that policymakers choose to ignore: with a constitutional amendment, “given an appropriately designed graduated-rate structure, Illinois could cut the overall state income tax burden for 94 percent of all taxpayers—on average providing a tax cut to every taxpayer with less than $150,000 in base income annually, raise at least $2.4 billion more in revenue, and keep the effective individual income tax rate for millionaires well below five percent…  Illinois taxpayers with the bottom 94 percent of base income collectively would receive an annual tax cut of $1.06 billion… [T]he combined effect of this policy would be a stimulus to the economy from tax cuts and additional state spending (assuming that the additional revenue is used to fund current public services that would otherwise not be funded) that would create at least 36,000 private sector jobs in communities across Illinois…” (CTBA);

·         Furthermore, the state should tax services. Illinois is one of five states with sales taxes on fewer than 20 services (The Center on Budget and Policy Priorities);

·         Establish a financial transaction tax or “Robin Hood Tax”: a .50 cent tax on every $100 of transacting. “We used to have a financial transaction tax in this country from 1914 to 1966” (Bill Moyers);

·         Eliminate the tax loophole for “Tax Increment Financing Districts” and save “$1.2 billion a year” (Greg Leroy from a national policy resource center for corporate and government accountability in Washington, DC, GoodJobsFirst.org);

·         “Broaden the sales tax base to include selected consumer services for an estimated new revenue of $550 million a year” (Illinois Education Association, IEA);

·         Eliminate “Edge Tax Credits” for large corporations and save “$347 million a year”; eliminate “Accelerated Depreciation” or “write offs” of all assets and save “$333 million a year” (Leroy);

·         Reinstitute “fund sweeps”: surplus revenue should be added to the General Revenue Fund “for an estimated new revenue of $300 million a year” (IEA);

·         Add “exceeded revenue” from the Road Fund (motor vehicle and driver’s license fees) to the General Revenue Fund “for an estimated new revenue of $250 million a year”; reduce aggregate transfers/eliminate “some statutory transfers” from the General Revenue Fund “for an estimated new revenue of $200 million a year” (IEA);

·         Eliminate “Single Sales Factor” that “allows large corporations to cut their taxes 80-90% and save “$96-217 million a year”; eliminate “Vendor Discounts” that allow companies “to keep an uncapped part of their state taxes as a ‘processing’ fee” and save “$126 million a year” (Leroy);

·         Eliminate or cap the “retailers’ discount” that businesses keep: 1.75% of sales taxes paid for by the rest of us “for an estimated new revenue of $100 million a year” (IEA);

·         Increase taxation on the wealthy: Illinois is in the top 10 of regressive state tax systems where the wealthiest taxpayers do not pay as much of their incomes in taxes as the poorest and middle-income wage earners (The Institute on Taxation and Economic Policy);

·         Implement a more timely system of payments (cash management practices are greatly affected by budgetary practices in relation to deferred liabilities which place additional pressures particularly in the first and second quarters of the year to pay those expenses; timing of tax payments also affects the state's cash flow and should be adjusted accordingly);

·         Examine and improve the efficiency of the state’s government;

·         There should be term limits for Illinois policymakers.

We cannot forget that Illinois legislators have diverted nearly $15 billion from the Teachers’ Retirement System and more than $30 billion intended for the five pension systems over the past decades. General Assemblies have created half of the pension systems’ unfunded liabilities and, as a result, the State of Illinois has a serious REVENUE PROBLEM that must be resolved. Teachers and other public employees did not cause the revenue and debt problems in Illinois. Teachers paid 9.4 percent of their total earnings each year into their pension system.

There is a legal basis for protection of public pension rights and benefits in the State of Illinois. It is called Article XIII, Section 5 of the Illinois Constitution. It is unconscionable to coerce teachers and other public employees to pay for the state's heinous irresponsibility and corruption. 

-Glen Brown

Please also read:

Illinois Pension Reform Is without Legal and Moral Justification

"Background on Illinois Corporate Tax Loopholes."