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