Illinois has a chronic,
structural fiscal problem so huge that it
cannot be eliminated by increases in economic growth alone, increases in taxes
alone, or—alas— aggressive pension changes alone.1 In early December
2013 the General Assembly passed, and Governor Quinn quickly signed, a major
pension reduction bill. In this brief, we project Illinois’ budget gap with
estimates of the fiscal impact of the new pension law. The state still has a
large structural imbalance after the pension changes.
THE FISCAL FUTURES MODEL
In measuring the fiscal condition of the state, we:2
· Use a broad-based budget measure (700+ special
funds in addition to the state’s General Funds) to provide consistency and
eliminate confusion from fund accounting changes;
· Use a
long-term perspective that projects budget trends a number of years into the
future;
· Focus on sustainable revenue that ignores new
borrowing or decreases in fund account balances when calculating the Budget Gap
= Total Revenue – Total Spending.
DECEMBER 2013 PENSION CHANGES
The General Assembly passed SB 1
in special session on December 3, 2013. Two days later the governor signed the
bill, making significant changes in four of the state’s five public employee
pension systems.
The intent of the new law is to
reduce the state’s fiscal burden of paying for future pension obligations. The
savings to the state come mostly from reductions in cost of living adjustments
for current and future recipients of state pensions.3
QUALIFICATIONS
In evaluating the fiscal impact,
we assume there are no successful challenges to the new pension law and that
there is no delay in implementation of the changes. This assumption may prove
not to hold given that the Illinois Constitution states that pension benefits
“shall not be diminished or impaired” and that employee unions have already
begun to file challenges.4 Also, we rely on initial actuarial
estimates of the new law.5
BUDGET GAP PROJECTIONS
...The budget gap is projected to get worse over the
next ten years—from -$1 billion in FY 2014 to -$14 billion in FY 2025... The state’s fiscal
problems are so great that much still remains to be done. A look at the
structural budget gap... suggests that a gap on the order of $3 billion in
2015, increasing to $13 billion in 2025 still remains. What would it take to
close the remaining gap?...
HOW ABOUT HIGHER TAXES?
All of the projections... assume
current tax law, with temporarily higher tax rates in 2014 declining as
scheduled starting in 2015. One policy option is to eliminate the phase-out and
make the higher income tax rates permanent... Maintaining higher taxes
eliminates roughly half the budget gap compared to the previous figure—reaching
only $7 billion in FY 2025... The combined effect of pension law revision and
tax increases still leaves a budget gap of $1 billion in FY 2014, which is
projected to grow to $5.5 billion by 2025.
PROBLEMS REMAIN
Illinois has two huge fiscal problems: a large and growing gap between
sustainable revenues and projected spending levels, and a largest-in-the-nation
unfunded pension liability.
· The
December 2013 changes to Illinois pension law (should they survive a
constitutional challenge) eliminate the unfunded pension liability problem over
the next 25 to 30 years... Unfortunately,
the pension law changes do not come close to solving the structural budget gap
problem. Savings of just over $1 billion per year barely dent a projected gap
of $4 billion to $14 billion over the next ten years.
Even if combined with higher tax
rates, pension revisions leave a large projected budget gap... The fundamental
take-home message: pension revision does not solve Illinois’ fiscal problems.
NOTES
1 Dye, Hudspeth and
Merriman, October 2013, “Peering Over Illinois’ Fiscal Cliff: New Projections
from IGPA’s Fiscal Futures Model,” (http://igpa.uillinois.edu/system/files/
Fiscal-Futures-Projections-Oct-2013.pdf). Also see the one-page summary of that
report (http://igpa.uillinois.edu/ system/files/Fiscal-Cliff-Fact-Sheet.pdf).
2 These are explained
in more detail in the paper cited in note 1 and other reports on our webpage: http://igpa.uillinois.edu/fiscalfutures.
3 State Employees’
Retirement System of Illinois (SERS), “Senate Bill 1 Public Act 98-0599,
Effective June 1, 2014 (https://www.srs.illinois.gov/sers/WNpension_FY14.htm).
4 U of I law professors
discuss Constitutional questions: http://www.news-gazette.com/opinion/
guest-commentary/2013-12-08/illinois-pension-reform-constitutional.html ;
Employee unions prepare lawsuit: http://www.sj-r.com/article/20131204/NEWS/131209783; Rick Pearson, “Retired teachers file first lawsuit
against Illinois pension reform law,” December 28, 2013, http://articles.chicagotribune.com/2013-12-28/news/ chi-retired-teachers-file-first-lawsuit-against-illinois-pension-reform-law-20131227_1_employee-pension-system-illinois-pension-code-teacher-retirement-system.
5SERS: Gabriel Roeder
Smith & Company, December 19, 2013, “Illinois SERS – Public Act 98-0599,
Baseline 7/1/2013,” (SERS_
PA980599_Contribution_UAL_Summary_Values_12192013.xlsx).
SURS: Gabriel Roeder Smith &
Company, December 20, 2013, “Illinois SURS, Senate Bill1/Public Act 98-0599
Analysis with Normal Cost Plus Level Percent of Pay Amortization of Unfunded
Liability, Baseline 7/1/2013 (excludes SMP and debt service contributions,
includes supplemental payments),” (SURS_
SenateBill1_Study_Summary_20131220_SendValues.xlsx).
3
|
TRS: Buck Consultants, November
29, 2013, “Teachers’ Retirement System of the State of Illinois, Actuarial
Request on behalf of Legislative Leaders submitted November 1, 2013 with
Threshold COLA indexed at Full CPI, Comparison of Contributions and Actuarial
Accrued Liability,” (11-30-13 TRS Analysis of Legislative Leaders’ Request -
Proposal Dated N.... pdf). These numbers are preliminary, because at this
writing TRS has not issued estimates of the final law as enacted. It was
possible to revise the projections to include the late provision that the state
make additional payments equal to ten percent of the savings from prior law.
Results presented at five-year intervals were filled in by interpolation.
Unfunded pension liabilities for TRS were missing and assumed to have same
proportional change as sum of SERS and SURS.
GARS and JRS: Commission on
Governmental Forecasting and Accountability, November 2013, “Special Pension
Briefing: State Retirement Systems Overview,” (http://cgfa.ilga.gov/
Upload/1113%20SPECIAL%20PENSION%20BRIEFING.pdf). JRS is not affected by the new
law. No actuarial estimates of the impact of the new law on GARS were given,
and revision was assumed to have no effect on projected amounts from the above
report...
The Fiscal Futures Project began
in 2008 out of concern that the state of Illinois lacked sufficient capacity to
project its fiscal demands and revenue streams into the future. A longer term perspective
is needed due to:
·
The structural deficit: state
expenditures have been growing faster than revenue
· The serious
consequences of making policy choices while ignoring the impact on the budget
in future years
· The relentless
pressure on future budgets from an aging population and continuing increases in
the cost of health care
The Institute of Government and Public Affairs (IGPA) is a public
policy research organization based in all three University of Illinois campus
cities. IGPA’s mission is to improve public policy and government performance
by: producing and distributing cutting-edge research and analysis, engaging the
public in dialogue and education, and providing practical assistance in
decision making to government and policymakers. The institute’s work not only
advances knowledge, but also provides real solutions for the state’s most
difficult challenges. IGPA plays an important role in assisting government to
better serve the public good. IGPA provides access to top-quality University of
Illinois research to improve decision making at every level of government.
For the Complete Report, including detailed substantiation of proof: http://igpa.uillinois.edu/system/files/Pension-Reform-Will-Not-Fix-Deficit.pdf
No comments:
Post a Comment
Note: Only a member of this blog may post a comment.