Illinois' Budget Deficit: Raising More Revenue Is the Right Solution for Needed Services and Pension Stabilization

Can the State of Illinois solve its budget problems without creating new revenue?   The answer is no.  If expenditures must at least equal revenues, then what needs to be done is to enhance the state’s sources of revenue.  How will the state raise more revenue and, thus, pay its debts as well as stimulate economic growth?  Many of the previous posts in this blog have reiterated that solutions to the state’s budget deficit include increasing the state’s revenue sources by changing the current individual income tax to a progressive or graduated income tax; broadening the state’s tax base; taxing services; increasing taxation on “undesirable habits” like gambling, cigarettes and alcohol; implementing a more timely system of payments; eliminating unnecessary tax breaks and loopholes for corporations; increasing taxation on the wealthy to achieve fairness, and examining and improving the efficiency of the state’s government.  It is discouraging that these suggestions have fallen on the deaf ears of many Illinois legislators.

If the state’s policymakers insist upon “spending cuts” as a solution, how will the State of Illinois maintain essential services for its citizens? According to the Center on Budget and Policy Priorities (January 2012), “spending cuts are problematic during an economic downturn because they reduce overall demand and can make the downturn deeper. When states cut spending, they lay off employees, cancel contracts with vendors, eliminate or lower payments to businesses and nonprofit organizations that provide direct services, and cut benefit payments to individuals… Companies and organizations that would have received government payments have less money to spend on salaries and supplies, and individuals who would have received salaries or benefits have less money for consumption… Raising taxes, along with enacting [non-essential] budget cuts, is needed to close state budget gaps in order to maintain important services while minimizing harmful effects on the economy…” 

Moreover, if the governor and some state legislators insist that “everything is on the table” regarding the state’s public pension systems, then consider what Ralph Martire, Executive Director at Center for Tax and Budget Accountability, recently suggested: the “ramp,” (which entails larger payments needed today as a result of the 1995 funding law – Public Act 88-593 – to pay the pension systems what the state owes because of its delinquent payments to those systems for decades and to reach a 90-percent funding ratio by 2045), “must be changed.”  In other words, the payment “ramp” should be “amortized like a mortgaged loan where set payments can be guaranteed over a long period of time.” This is a first step for addressing the public pensions’ unfunded liabilities.  Meanwhile, policymakers should remain patient and cautious about any radical pension “reforms” offered by the Civic Committee of the Commercial Club of Chicago (as in the case of specious SB 512) and other recent bills that have been proposed thus far by a few legislators.  They are not solutions.  They are not even quick fixes for the symptoms of a greater problem that the State of Illinois confronts.

According to the Illinois Retirement Security Initiative, a Project of the Center for Tax and Budget Accountability (CTBA, February 2011), “when compared to the state’s projected revenue growth, the state’s required pension contribution may be more manageable than many believe… assuming revenues grow at 2.8 percent per year, and the state maintains its personal income tax rate at five percent and its corporate income tax rate at seven percent.”  In line with this type of thinking, we may assume that if the state expanded its potential revenue base, along with anticipated assets in the pension systems, “even Illinois, [with] the most underfunded pension plans in the country, would only have to boost tax revenue by less than 0.2 percent over the next 30 years to meet its projected shortfalls” (Dean Baker, Co-Director at the Center for Economic Policy and Research). 

In a more recent article from CTBA, entitled “The Case for Creating a Graduated Income Tax in Illinois” (February 2012), “most taxes imposed by state and local government, like sales, excise and property, are inherently regressive, that is, [they] take a greater share of the earnings from low to moderate income families than from affluent families.  Creating a graduated-rate structure for the Illinois income tax is one of the few strategies available to counteract the natural [regressive results] of most taxes. Illinois is denied this fundamental tax fairness tool by a state constitution [Article IX, Section 3(a)] that requires one flat income tax rate for all taxpayers…

“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."

Indeed, it has been said that small increases in funding can help offset a state’s budget problems.  As stated by David Madland, Director of the American Worker Project at the Center for American Progress Action Fund and Nick Bunker, Special Assistant with the Economic Policy team at that Center (March 2011): “the costs of public-sector pensions are often implicated in the conservative budget critique... [Most pension systems across the country are] ‘underfunded, in large measure because—like the investments held in 401(k) plans by American private-sector employees—they sunk along with the entire stock market.’”  

Madland and Bunker further assert (and they coincidentally concur with Public Information Officer Dave Urbanek of the Teachers’ Retirement System of Illinois) that “[a] pension funding shortfall is a not an immediate crisis but rather a problem with a long-time horizon. Pension plans have sufficient funds to pay all benefits for years to come… The extent of the shortfall is often overblown. Claims that public-sector pensions face shortfalls… assume pension funds will only earn the so-called riskless rate of return, which economists calculate in the range of about 4 percent to 5 percent. This ignores that pension funds have actually earned returns well above that riskless rate for many decades—above 9 percent since 1984—and are likely to continue to do so.”

Consistent with Madland’s and Bunker’s assessment is the recent report from the Teachers’ Retirement System of Illinois (TRS) that proclaims “in fiscal year 2011, which ended last June, TRS recorded a 23.6 percent rate of return after all fees had been subtracted and generated $7.2 billion in investment income during the year. At the end of FY 2011, total assets stood at $37.7 billion… The TRS average investment return for a 25-year period ending in FY 2010 was 8.6 percent. The average TRS investment return for the 30-year period between 1981 and 2011 was 9.3 percent. Both rates beat the System’s assumed long-term rate of return of 8.5 percent. Data compiled by the System’s independent investment consultant over multiple time periods beyond the decade being studied by TRS shows that the System’s investment performance ranks highly among similar public pension funds.”

What’s more, add to this data that “government employees and public-sector unions are the folks conservatives love to ‘tar’ for the unpleasant fiscal situation in state and local governments. But there is little evidence that government workers or public-sector unions are responsible for budget deficits. Employee compensation has remained a constant share of state expenditures, and state and local workers are actually underpaid relative to comparable private-sector workers. Instead, the short-term deficits are primarily the result of the Great Recession [and a lack of proper funding to the public pension systems]” (Madland, Bunker).

Conclusively, “claims that public-sector pensions will bankrupt state and local governments are exaggerated… Policymakers [who] attempt to reduce their budget deficit by cutting solely public employee compensation [through healthcare and pension “reform”]—rather than by considering a balanced approach of appropriate cuts in several areas of the budget and revenue increases—[will create] large-scale job losses among public-sector workers, [jeopardize the subsistence of thousands of retirees and their families] and [generate] more pain for the overall [state’s] economy” (Madland, Bunker).

See Tax Reform! Not Pension Reform, Budget Cuts and Tax Breaks for the Wealthy, Nov. 20, 2011;

Spread the Burden of Taxes and Address Tax Inequities in Illinois, July 25, 2011

Paolo and Francesca

A history teacher took a novel approach
to dealing with a student who fell asleep in class:
he licked the student’s ear.
            --from a news story

That day we read no further.
           --Canto V, Circle 2: The Inferno

Don’t fall asleep in Mr. Henry’s class.
He’ll lick your ear clean
with unblinking eyes and feline agility.
He teaches history for pay,
tongues ear wax for free.
He brings mystic lore from home,
Egyptian magic and talismans,
voluptuous lapping and a mysterious
sense of propriety.

Perhaps it was the waning moon

eaten away by field mice
that prompted Mr. Henry to arch his back
and purr while he licked that ear.

But someone did not like

Mr. Henry’s skulking as the mythic
cat of the classroom.
The school board found him indiscreet;
the students found it peculiar
that their classmate remained
in a passionate embrace with Morpheus
on the dark forests of a history text.
A small pool of spit
drowned the other lesson of the day.

“Paolo and Francesca” was originally published by Thorntree Press in Troika IV, 1994.

There Is a Conspiracy throughout the World... a “Crisis of Fairness”

“There is an economic crisis in the UK, but it was not caused by excessive public spending or the ‘gold-plated’ pensions and pay of public-sector workers. It was caused by a recession triggered by the banking collapse of 2007. Now there is another crisis: a crisis of fairness in which those who caused the economic mess are forcing everyone else in society to pay for it. It is clear whose side Cameron’s cabinet of millionaires is on. Trade unions represent people in the public, private and voluntary sectors. Our members will often experience each through their working lives – as will their partners, friends and family. Good occupational pension schemes are important wherever you work. Most pensioners are reliant on the basic state pension for the majority of their income in retirement, but it pays below the government’s own poverty line. Disgracefully today there are 2.5 million pensioners living in poverty in the UK. Only one in three private sector workers is now a member of an employer-sponsored pension scheme, public sector pensions are under threat, and the state pension is now worth just 15% of average male earnings. 
 

“On the other hand a quarter of all tax relief on pensions, amounting to more than £10bn annually, goes to the richest 1% in the country. We hear about gold-plated public sector pensions, yet the real gilded pensions are to be found in the boardrooms of private companies that have abandoned provision for their workforces. There is a crisis of pensions in the UK, but it’s not that we’re living too long or that pensions are unaffordable; it’s a crisis of fairness.

“In retirement, as in working life, we are highly unequal. UK pensioner poverty is among the worst in Europe – only Cyprus, Latvia, Estonia [and the United States] abandon their pensioners to a greater degree. Action is needed to secure decent state pensions as the foundation for pensioner income and decent employer-sponsored pension provision for all workers in all employment sectors. Please join our campaign for ‘Fair pensions for all’.

Introduction: a crisis of fairness

Public sector pensions: affordable and sustainable

“The pensions of public sector workers have come under intense scrutiny in recent months, with ministers and the media describing them as ‘gold-plated’ and ‘unaffordable.’ Currently, public sector workers are being told they must pay more and work longer for a lower pension – but is this necessary? Last year the government asked Lord Hutton to lead an independent commission into public sector pensions… ‘Currently public sector workers are being told they must pay more and work longer.’

“Although the average person is living longer, there are massive inequalities in life expectancy: men and women in the wealthiest areas live 10 years longer, on average, than those from the poorest areas. The wealthiest can often afford to take early retirement too, whereas the poorest often already have to continue working beyond the state retirement age. Just because we are living longer, it does not necessarily mean we are fit to work longer: 40% of people aged 65–74 have a disability or illness that limits their quality of life. Pensioner poverty also intensifies the prejudices that exist over people’s working lives. Women, disabled and ethnic minority pensioners are far more likely to be in poverty because they are discriminated against by employers. Over several years, governments have allowed companies to abandon their pension duties to their staff, allowed the state pension to fall further and further behind living standards, and today’s government is now attacking public sector pensions too. We don’t want an equality of misery, but fair pensions for all: public, private and state pensions...

“Nearly one in five of us, living in the UK, are over the state retirement age. A fair pension for all is affordable in the sixth largest economy in the world, if we choose it to be. A pension is income deferred. Whether it is through national insurance or contributions to an occupational scheme, we have set aside income today to pay for our pensions tomorrow. We like to think of retirement as a time of relaxation and leisure, but for very many people it is a time of hardship and stress – with a growing proportion literally having to choose between heating and eating. Every winter tens of thousands of retired people die from cold-related illnesses. We are all living longer and should welcome that life expectancy continues to improve, but those improvements have been very uneven… There is a huge life expectancy gap between the richest and the poorest.

“We must also consider the impact of working longer on unemployment – the impact that has on young workers starting off. Youth unemployment is at the highest level on record. Finally, we ought to acknowledge that longer retirements are not necessarily unaffordable, but are a question of priorities and balance. The government is proposing little to tackle the scandal of private sector occupational pensions, or the poverty level of the basic state pension. The government’s current attempts to cut public sector pensions will create more misery and more poverty in retirement. We hope that you, whether you’re in the public sector or private sector, whether you’re working, unemployed or already retired, will join our campaign for ‘Fair pensions for all’ because the injustice of pensioner poverty requires us to work together so that everyone has a decent standard of living in retirement…”

--from the Public and Commercial Services Union in the UK

Like So-called "Pension Reform": It's Quite Simple

Let’s imagine we haven’t paid our bills for a very long time, perhaps our mortgage or rent, taxes and insurance policies, credit cards and utility bills. Now let’s do what Illinois politicians are trying to do to public employees: let’s ask our banks, county collector, and companies to whom we are indebted to pay down what we owe them. 

That’s right! It’s quite simple; besides it’s all about “shared sacrifice,” isn’t it? So let’s write our own piece of legislation reform and proclaim that bank and business CEOs must cap their earnings, raise their retirement ages, reduce their Cost-of-Living Adjustments, and shift the burden of debts to them instead of us. In short, let's break a contract!

As many politicians have often whined that “we have to do something,” our crafty idea is just like the Illinois General Assembly’s so-called “pension reform” bill.

And like these liars and thieves who are attempting to break a constitutional contract with public employees and retirees, let’s shift our debts to those for whom we owe money and hire lobbyists from the Civic Committee, Civic Federation or Illinois Policy Institute; let's enlist corporate-owned media, like the Chicago Tribune and other corporate-bought entities, to promulgate our scam. Let's hire a few dishonest lawyers and accountants to put pressure on our lenders and to challenge the legality of what is owed. Let's also claim we are in a financial crisis, but it's not our fault!

Could it be that simple for us to transfer the burden of what we owe our moneylenders, challenge our contractual obligations in the courts, and rewrite the laws and policies in our favor? After all, we would be simply following the egregious, corrupt tradition of Illinois politics.

-Glen Brown

Why Any Illinois "Pension Reform" Is a Devious Ruse

Because we are victims of today’s state (and federal) politics that have created an unethical “winner-take-all” economy for wealthy egomaniacs at the expense of everyone else; because we are victims of Republican and Democratic policymakers at the state and federal levels who align their interests with other self-aggrandizing thieves and who pass laws that sustain their concentrated economic privilege and power; because we are victims of deregulation and tax reductions for the wealthy minority that have resulted from organized political action by and in support of the wealthy sector; because we are victims of their divide-and-conquer strategy, fallacious rationalizations, distorted information and relentless priority on radical “pension reform” for public employees and retirees and tax cuts for themselves, regardless of whether corporate welfare produces more deficits.

Because we are victims of insidious financial “reforms” that do not resolve the state or federal deficit problems but accommodate and reinforce the enormous inequality of organizational resources of these thriving self-seekers; because we are victims of their tyranny and their lack of accountability for destroying a representative democracy and a just economy; because we are victims of their Super PACs and their vast resources of money and influence committed to reforming the rules and policies that have adversely affected the lives of the middle class and disenfranchised; because we are victims of their schemes to reallocate the state’s liabilities to teachers and school districts.

Because we are victims of their machinations, where the vast majority of workers will not receive a defined-benefit retirement plan but where most corporate executives will have this guarantee, where these same business czars will retire with exorbitant bonuses and other outrageous incentives, and where nothing has been done to change this gross injustice.

Because we are victims of partisan polarization and well-financed organizational interest group politics and policies, of compromised corporate-owned media that have been bought by the wealthy minority to shape what and how we think about fiscal issues; because we are also victims of many unethical policymakers who are clueless about “long-term retirement policy objectives” and are “influenced by projections that include unrelated healthcare liabilities or irrelevant corporate sector metrics,” and who have no desire to pay what is owed to the public pension systems that so-called “pension reform” is a devious ruse.

And because we are victims of today’s disappearing and weakened organized labor unions that were once the guardians of middle-class workers and a representative democracy; because we are victims of our unions' lack of strong leadership and their lack of sustained organizational acumen, and because of our own indecisiveness and political ignorance; because of our inability to marshal essential resources and to draw upon experts in the fields of economics and law; because of our inability to build an effective coalition and to launch a counter-attack against the arrogant, wealthy minority that is waging an economic war against the poor and middle class in Illinois and elsewhere, we will continue to be the scapegoats for the reprehensible problems created by the “wealthy elite” until we mobilize our collective efforts against their powerful economic interests, their lucrative lobbying of the state’s policymakers, and their insistence upon deficit reduction by way of public “pension reform.”

-Glen Brown

Because

It’s an echo of the question why, 
a boomerang of logic, the reason
for punching the little girl’s arm,
for breaking her new doll.

And bullies say it
with firecracker snap, owl-eyed
and with the whack and thump
of an eighteenth-century beheading.

Because is all the reason they need,
the way out of the pickle, the password
for the storybook door, the answer
to why the chicken crossed the road.


“Because” was originally published by Thorntree Press in Troika IV.