Sextet Dragon by Fred Klonsky
“Illinois’ budget this year is more than $8 billion in the red, some would say closer to $9 billion. That’s after the state raised the personal income tax rate last year from 3 percent to 5 percent and the corporate rate from 4.8 percent to 7 percent to bring in about $6 billion more a year...
“The Governor’s Office of Management and Budget has stated that even with anticipated growth in sales tax income and other new sources of revenue (if the economy continues to recover), the state will incur an estimated $3.76 billion loss in overall revenue if the income tax hikes are allowed to expire…
“What pension reform today would do is lower the interest rate that the state would pay on the sale of bonds. In other words, Illinois could borrow more money and spend even more money than it has. And that’s exactly how the pension ‘crisis’ was created in the first place. Instead of making its mandated payments to its five pension systems, the state for decades spent that money on other government programs.
“Back in 1995, Ralph Martire, [Executive Director of Center for Tax and Budget Accountability] said, Republican Gov. Jim Edgar recognized the problem, and a law was passed requiring Illinois to make its annual pension contribution, including interest on what it owed. Only, under Edgar’s plan, the so-called ‘pension ramp’ didn’t begin for another 15 years.
‘“It was the perfect political solution,’ Martire said. ‘You keep on spending while kicking the can down the road, and the idea was that none of those elected officials would be around in 15 years when that pension ramp kicked in.’ [What legislators are still around? Click Here.]
“Martire contends that it’s the ramp, including 8.5 percent interest on the amount of money owed, that’s creating the pension crisis more than the benefits provided by the five plans. He said the state’s pension contribution last year was $4.1 billion, of which only $1.6 billion was the cost of funding benefits. In fiscal year 2013, more than $5 billion went to repay debt incurred.
“So even if benefits were changed to bring down that annual amount to $1 billion (a really good deal), it wouldn’t offset the billions of dollars the state loses once that temporary income tax increase vanishes.
“Martire makes the argument that Illinois would be better off ‘getting rid of the crazy amortization payment schedule for pensions’ instead of cutting benefits for employees. But, and it’s a big but, the state would have to go to a graduated income tax (replacing the flat tax now in place) and broaden its sales tax base. That would boost tax revenue and enable the state to afford a pension repayment schedule that was more reasonable, according to Martire.
“‘Within a few years, we could have a balanced state budget and the pension systems would be sound going into the future because the state would be able to make its payments,’ he said. ‘And Illinois might finally have enough money to fund education properly…’”