Friday, May 11, 2012

A Revenue/Pension Discussion with Eric Zorn, Pt. 3

To Glen,

As you know, there is substantial and vigorous disagreement among very learned lawyers about the meaning of the pension clause in the Illinois Constitution. Does it mean only that benefits already earned shall not be diminished? Or that benefits earned in the future must be calculated based on the most advantageous past pension formula?

My view, which is based neither on case law nor an educated analysis of Constitutional intent, is that future pension benefits based on future service ought to be as re-negotiable as is future salary based on future service.

 I can see why you don’t like my view --- it suggests pension plans shouldn’t be the secure super-contracts teachers have long assumed they are – but I don’t see why you find it morally and ethically objectionable. Most of us face less than certain futures and must deal with changing circumstances – suddenly higher taxes, for example, foisted on us by politicians whose lives have become a Hitchcockian nightmare of chickens coming home to roost.

 In theory, public pension systems are a fine idea. In practice, they’ve inspired politicians to saddle their successors and taxpayers of the future with additional burdens and investment risk, paying for today’s goodies with tomorrow’s money (or, in the case of suburban school districts and municipalities, other people’s money). Teachers unions have showered these same profligate pols with millions in contributions.

Meanwhile, the Tribune editorial board, which teachers seem to believe is a co-conspirator in all this, has been sounding the alarm: The state “skips a pension fund payment to help meet one year's operating expenses, never bothering to wonder how it will meet those same expenses next year - let alone get the cash to replace the money it borrowed,” said a March, 1991, editorial. “Maybe if legislative leaders are forced to deal with today's honest numbers, rather than buying with the promise of money to come tomorrow, they can make a frank assessment of the state's revenue situation.”

My ideas for boosting revenue to pay our bills and meet future needs include graduating the income tax, expanding the goods and services subjected to the sales tax and taxing retirement income.

It also includes pension reform that outlaws payment skipping, makes the contracting entity responsible for setting benefit levels and making payments and adjusts terms and benefits going forward to keep the systems solvent and prevent the sudden, whopping tax increases that will be needed to continue sustaining the unsustainable.

Eric Zorn

Dear Eric,
We agree that a graduated income tax is needed “for boosting revenue” and for addressing the state’s structural flaws in its tax system.  Because the State of Illinois diverted revenue that should have funded the pension systems and cannot evade the unfunded liability, a practical response by policymakers should be the creation of a graduated tax rate used by 43 other states in this country. This is even more crucial since General Fund spending has been capped.

What’s more, if policymakers shift the normal costs to the pension system to local school districts and universities, it “would only mean that an even higher proportion of school district’s revenue would come from property taxes” (The Center for Tax and Budget Accountability, CTBA).  Representative Darlene Senger told me she thinks this is a “bad idea.”
It appears we also agree policymakers need to design a broad-base tax base. “A majority of states apply their sales tax to less than one-third of 168 potentially-taxable services. Five of the 45 states with sales taxes impose them on fewer than 20 services… Research suggests that purchases of some services do not fall as precipitously as durable goods purchases do when the economy slows nor rise as rapidly when the economy is booming.” States that do not tax services, such as Illinois, “probably could increase [its] sales tax revenue by more than one-third if [it] taxed services purchased by households comprehensively” (The Center on Budget and Policy Priorities).

Consider the fact that a broader-based taxation system would provide a decrease in taxes for low-income and many middle-income families. Taxing services alone “would generate enough revenue to stabilize the General Revenue Fund and prevent structural deficits that lead to cuts in basic needs and social service programs” (CTBA).

To achieve fairness or a “shared sacrifice,” policymakers also need to consider putting an end to “corporate welfare,” in particular, extortive tax breaks and loopholes. The Institute on Taxation and Economic Policy maintains that the top five percent of income earners in Illinois pay the least amount of sales, excise, property, and income taxes because of federal deduction offsets or substantial tax savings (regressive tax loopholes) from itemized deductions, such as capital gains tax breaks and deductions for federal income taxes paid that are coupled with a flat-rate structure.

We both agree 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 just like a home loan that is amortized (CTBA). The ill-conceived ramp-up design (Public Act 88-0593, FY 1996) to pay down the state’s debt demonstrates the dangers of acting without careful or more systemic planning.

Lastly, Eric, the Chicago Tribune of 1991 is certainly not the Chicago Tribune of today; for everything else that you mentioned, my view is the courts will rule to uphold a state and federal constitutional ban on diminishing or impairing contracts, just like they have in Arizona, New Hampshire (February 15, 2012) and  Florida (March 6, 2012). In regard to your comment that “teachers’ unions have showered… millions in contributions,” perhaps corporate lobbyists and Citizens United, et al. should be our next discussion.


1 comment:

  1. I would like to say to Eric that it really only takes a few minutes of research to determine that there is indeed no widespread disagreement among "learned lawyers" about the meaning of the pension clause. Indeed, the opposite is true; there is widespread agreement, buttressed by seven court decisions.

    The existence of a two-page opinion to the contrary, written by a firm hired to argue that position, hardly constitutes a widespread disagreement. Lawyers make all kinds of cases; that's what they're paid to do.

    But scholars, judges, and basically everyone looking at this thing in an honest way are in widespread agreement. Read the history.