A Pension Discussion with Eric Zorn, Pt. 2

To Glen:

The law protects all employees against the sort of discrimination you describe, but very few employees have what you describe as a “sensible expectation of continued employment,” much as they too would like to have it. Many reports – including one published in our pages last year – indicate that it’s so difficult, time consuming and expensive for administrators to fire tenured teachers for incompetence that they seldom attempt it.

But let’s not get sidetracked on these broader issues. I’m sure we agree, along with most of the public, that good teachers and other union employees should be protected from arbitrary and unfair treatment, and that bad teachers should be subject to the same consequences for incompetence as most workers everywhere.

I’m sure we also agree that a deal should be a deal, whether hindsight suggests it was a good deal or a bad deal. We can go round and round debating whether the teachers’ promised return on their retirement investment has been excessively generous – by which I mean greater than the return would have been if the money had been privately invested and guaranteed in a way that private investment is not -- but the fact is that this return was promised to teachers in binding contracts and that the state remains on the hook for that debt even though it failed to set aside money to pay it.

Where we may disagree is whether the state should continue, going forward, offering teachers and other public employees the same pension deals – the same level of return on investment. Particularly if doing so would require significant tax increases or program and service cuts.

I realize the state constitution may prevent even a prospective change in the pension deal, even as I’m sure you realize the state constitution prevents the implementation of a graduated income tax, which I’m inferring is what you’re alluding to when you mention our “inequitable revenue system.”

Is it really unfair – an unconscionable example of teacher bashing – to say “OK, we’ll make good on what we owe you as of today, but starting tomorrow (or as of the next contract) there’ll be a new understanding”? If so, do you have a better idea than just raising taxes to get us all out of this mess?

Eric Zorn

Dear Eric,

We both know how emotionally-charged words can incite: describing the pension promise of teachers as a “good or bad deal” or as “excessively generous” arouses negative feelings unnecessarily. The fact is these earned benefits are protected by a “legally binding contract,” as you say, and to “make good on what [the state] owes as of today” necessitates upholding Article XIII, Section 5 of the Illinois Constitution: “Membership in any pension or retirement system of the State… shall be an enforceable contractual relationship, the benefits of which shall not be diminished or impaired.”

Teachers acquire a “vested” right when they enter the pension system. In other words, pension benefits commence at the time a teacher’s contributions begin. The General Assembly cannot modify benefits except through an agreed-upon and fair “modification through contract principles” (Eric Madiar, Is Welching on Public Pension Promises an Option for Illinois?).  Furthermore, to respect contractual and constitutional promises as legitimate rights and moral concerns is at stake for EVERY citizen in Illinois. Why? Cheating ANY citizen’s guaranteed rights and benefits violates moral, ethical and legal principles implicit in the state and the U.S. Constitutions.

Illinois has a revenue problem and not a pension problem. Among the many proposals to “get us out of this mess”: eliminate the tax loophole for “Tax Increment Financing Districts”; eliminate “Edge Tax Credits” for large corporations; eliminate “Accelerated Depreciation” or “write offs” of all assets; eliminate “Single Sales Factor” that “allows large corporations to cut their taxes 80-90 percent, and  eliminate “Vendor Discounts” that allow companies “to keep an uncapped part of their state taxes as a ‘processing’ fee” (Illinois Tax Loopholes Cost Illinois Billions). There are many other suggestions, but these five recommendations would save approximately $2 billon, none of which raise taxes or require a constitutional amendment.

On the other hand, there is strong case to be made for a graduated income tax through a constitutional alternation. “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 create at least 36,000 private sector jobs in communities across Illinois… If Illinois were to adopt the same graduated income tax rate structure as Iowa, Illinois would raise $6.3 billion more in revenue than it does from its current five-percent flat rate, while over 54 percent… of all taxpayers would pay less in state income taxes” (The Case for a Graduated Income Tax in Illinois, The Center for Tax and Budget Accountability, February 2012). 

Though there was a pending bill (HJRCA0012, February 2011) to amend the state constitution to include a graduated income tax, the Illinois General Assembly chose to enact legislation giving tax cuts to profitable corporations instead.  Eric, what are your legal and ethical ideas for solving the state’s structural budget deficit?

glen

Revenue and pension discussion with Eric Zorn, Part 3 (May 11, 2012)