Tuesday, May 12, 2015

What Should Illinois Legislators Do Now Since They Cannot Break a Constitutional Contract with Retirees and Public Employees?





“…The General Assembly may find itself in crisis, but it is a crisis which other public pension systems managed to avoid and, as reflected in the SEC order, it is a crisis for which the General Assembly itself is largely responsible. Moreover, no possible claim can be made that no less drastic measures were available when balancing pension obligations with other State expenditures became problematic. One alternative, identified at the hearing on Public Act 98-599, would have been to adopt a new schedule for amortizing the unfunded liabilities. The General Assembly could also have sought additional tax revenue. While it did pass a temporary income tax increase, it allowed the increased rate to lapse to a lower rate even as pension funding was being debated and litigated.

“That the State did not select the least drastic means of addressing its financial difficulties is reinforced by the legislative history. As noted earlier in this opinion, the chief sponsor of the legislation stated candidly that other alternatives were available. Public Act 98-599 was in no sense a last resort. Rather, it was an expedient to break a political stalemate…” (In re PENSION REFORM LITIGATION (Doris Heaton et al., Appellees, v. Pat Quinn, Governor, State of Illinois, et al., Appellants) Opinion filed May 8, 2015, JUSTICE KARMEIER delivered the judgment of the court, with opinion. Chief Justice Garman and Justices Freeman, Thomas, Kilbride, Burke, and Theis concurred in the judgment and opinion).


What some of us have been saying for a very long time: 

The state’s regressive tax rate is what few legislators want to confront. Politicians, the Civic Committee, Civic Federation, Illinois Policy Institute, the Chicago Sun-Times, the Chicago Tribune, and the general news media have capitalized on a mostly vulnerable public by calling for radical pension reform as the solutions for the budget problems in Illinois. They were (and will continue to be) diversionary, scapegoating tactics that have allowed policymakers to escape their legal and ethical responsibilities. 

“At the core of the budget ‘crisis’ facing [Illinois] is [its] regressive state tax structure… That is, low-and-middle-income families pay a greater share of their income in taxes than the wealthy… [A regressive tax] disproportionately impacts low-income people because, unlike the wealthy, [low-income people] are forced to spend a majority of their income purchasing basic needs that are subject to sales taxes” (United for a Fair Economy).

Illinois income tax uses a single-rate structure that results in low-income wage earners paying more taxes than the wealthy. Illinois is among 10 states in the nation with the highest taxes paid by its poorest citizens at 13 percent (The Institute on Taxation and Economic Policy).

Pass a graduated rate income tax like the majority of states in this country. The state needs a tax rate that is “efficient with minimal impact on the economic decisions that taxpayers have to make” (Center for Tax and Budget Accountability), one that captures increased revenues in times of economic growth, one that maintains revenue collections during poor economic times, one that is simple and not liable to inconspicuous error, one that is transparent and builds trust with the state’s government officials (Center for Tax and Budget Accountability), and one that helps 99 percent of the state’s population.

Focus on why the State of Illinois cannot obtain more revenue. Besides federal sources of income, the state uses only 11 sources of revenue: personal income tax (but note Illinois was tied for the fourth lowest individual tax rate on households in the top income bracket), corporate income tax (note extortionate tax breaks given to many Illinois corporations!), sales tax (Illinois does not tax services like most other states for another significant source of revenue), corporate franchise tax and fees, public utility taxes, vehicle use tax, inheritance tax, insurance taxes and fees, cigarette taxes, liquor taxes and other miscellaneous (or rather unsubstantial) tax sources (Commission on Government Forecasting and Accountability).

“A majority of states apply their sales tax to less than one-third of 168 potentially-taxable services… [States that do not tax services, such as Illinois], could increase [its] sales tax revenue by more than one-third if [it] taxed services purchased by households comprehensively.” Illinois is one of five states with sales taxes on fewer than 20 services (The Center on Budget and Policy Priorities).

Expand the state’s tax base. A broader-based taxation system that 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” (Center for Tax and Budget Accountability).



Increase taxation on the wealthy: Illinois is in the top 10 of regressive state tax systems where the wealthiest taxpayers do not pay as much of their incomes in taxes as the poorest and middle-income wage earners. “Since the rich are able to save a much larger share of their incomes than middle-income families – and since the poor [can] rarely save at all – the taxes are inherently regressive” (The Institute on Taxation and Economic Policy).

Eliminate tax loophole for “Tax Increment Financing Districts.” 

Eliminate “Edge Tax Credits” and other tax loopholes for large corporations in Illinois.

Revamp the flawed Pension Ramp: “Starting in 1995, yet another funding plan was implemented by the General Assembly. This one called for the legislature to contribute sufficient funds each year to ensure that its contributions, along with the contributions by or on behalf of members and other income, would meet the cost of maintaining and administering the respective retirement systems on a 90% funded basis in accordance with actuarial recommendations by the end of the 2045 fiscal year. 40 ILCS 5/2-124, 14-131, 15-155, 16-158, 18-131 (West 2012). That plan, however, contained inherent shortcomings which were aggravated by a phased-in 'ramp period' and decisions by the legislature to lower its contributions in 2006 and 2007. As a result, the plan failed to control the State’s growing pension burden. To the contrary, the SEC recently pointed out:

“‘The Statutory Funding Plan’s contribution schedule increased the unfunded liability, underfunded the State’s pension obligations, and deferred pension funding. The resulting underfunding of the pension systems (Structural Underfunding) enabled the State to shift the burden associated with its pension costs to the future and, as a result, created significant financial stress and risks for the State.’ SEC order, at 3. That the funding plan would operate in this way did not catch the State off guard. In entering a cease-and-desist order against the State in connection with misrepresentations made by the State with respect to bonds sold to help cover pension expenses, the SEC noted that the State understood the adverse implications of its strategy for the State-funded pension systems and for the financial health of the State. Id. at 10. According to the SEC, the amount of the increase in the State’s unfunded liability over the period between 1996 and 2010 was $57 billion. Id. at 4.5 The SEC order found that ‘[t]he State’s insufficient contributions under the Statutory Funding Plan were the primary driver of this increase, outweighing other causal factors, such as market performance and changes in benefits.’” (Emphasis added.) Id. at 4 (In re PENSION REFORM LITIGATION (Doris Heaton et al., Appellees, v. Pat Quinn, Governor, State of Illinois, et al., Appellants) Opinion filed May 8, 2015, JUSTICE KARMEIER delivered the judgment of the court, with opinion. Chief Justice Garman and Justices Freeman, Thomas, Kilbride, Burke, and Theis concurred in the judgment and opinion).

Also from the Illinois Supreme Court Ruling: Senator Hutchinson: Would another alternative be the proposal that the Center for Tax and Budget Accountability outlined before the conference committee, which would have re-amortized the current unfunded liabilities to a new gradual [level] dollar payment schedule to achieve well over eighty percent by 2059? Senator Raoul: Yes. So that—that and many other things could have been possible alternatives.” 

The current “Pension Ramp” does not work for the five public pension systems. The “Ramp” entails larger payments today as a result of the 1995 funding law – Public Act 88-0593 – to pay the pensions systems what the state owes. 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 (a flat payment) just like a home loan that is amortized; though the initial payment will be difficult in the beginning, over the long term it will become a reduced cost and a smaller percentage of the overall Illinois budget as it is paid off throughout the years.

“Decades of mismanagement and failure to match contributions are the predominant reasons that the state’s pension systems are suffering to the degree that they are today. Years of pension holidays, continually borrowing against the systems without a plan for repayment and a severe economic recession, which caused investments to plummet, further exacerbated the problem” (Senate President John Cullerton).  Thus, there needs to be a required “actuarially-sound” annual payment from the state to the pension systems! Indeed, the State of Illinois has a revenue problem and its policymakers have stolen money for decades from public employees' pensions to hide this fact.

What will state policymakers most likely do instead?
They might consider shifting the state's normal costs to the pension systems to local school districts. They might consider creating a Tier III defined-contribution savings plan for new teachers. They will ignore the fact that current Tier II teachers are contributing too much to their pension plans (This will cause serious Social Security problems in the future for these teachers and the State of Illinois!). They will continue to increase the inequities that have existed in Illinois for years (budget cuts across the board for the middle class and poor and more corporate welfare for the wealthy elite). They will continue to blame public employees and retirees for the state's budget problems, often rekindling so-called pension reform discussions, as if the Illinois Supreme Court decision never happened. They might attempt to repeal the Pension Protection Clause as if the Illinois Supreme Court decision never happened. They might even attempt to re-negotiate with the public employees' unions again, hoping for another foolish agreement, like Senate Bill 2404... In short, it is much easier for liars and thieves among the Illinois General Assembly to continue their charade of political posturing and scapegoating public employees and retirees then to address the revenue and pension debt problems they have created and ignored in Illinois.


12 comments:

  1. Interesting that, among the solutions you posit (noting, in most cases, Illinois among a minority of states not doing), taxing pensions is conspicuously absent... something Illinois also numbers among a mere handful of states not presently imposing.

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    1. I am not opposed to taxing upper-level retirement income. I bet retired members of the Civic Committee of the Commercial Club of Chicago, the Civic Federation, Illinois Policy Institute, et al. would be opposed to having their retirement income taxed, however.

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  2. “Ralph Martire, executive director at the Center for Tax and Budget Accountability (CTBA), [said] that lawmakers need to get ‘more realistic’ about revenue options. ‘I think legislators need to grow up, and we need to have an honest discussion on revenue,’ he said. ‘It's the political system's refusal to deal with revenue and tax policy like adults that got us where we are today, so it created the unfunded liability in the pension system, which is a symptom of this revenue problem. It is not the cause of our fiscal problem.’

    “CTBA has put forward a proposal to re-amortize the state's pension debt, an approach Martire says ‘is the only constitutional way to fund the pensions and fund the current services.’ Under the center's pension re-amortization model, the debt owed to the state's pension system would be paid off over 42 years with a level annual debt service payment of $7.4 billion, Martire said.

    “As part of the CTBA's re-amortization blueprint, the state would have to expand its sales tax base to include consumer services, tax some retirement income (keeping the full exclusion for people with adjusted gross incomes of $50,000 a year or less) and increase the personal income tax rate from the current 3.75 percent to between 4.5 percent and 4.75 percent. The only people who would see an income tax on all of their retirement income would be those with at least $150,000 a year in adjusted gross income, Martire said.

    “‘It's not like it's impossible to find the revenue to do this. It's actually very possible, very pragmatic, very common sense,’ Martire said. ‘Without enhancing revenue, and doing those couple of revenue changes ... It's game over. You can't solve these problems. So let's be practical and do what we need to do’” (progressillinois.com).

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  3. Taxing retirement income is an adult action. Retirement contributions are done pre tax. Thus tax was never paid on that portion of income. Social Security the same thing. Why would it somehow be fair for rich folks to pay a more progressive tax but retired folks pay none. Do they use less roads? Do their family members use or get a benefit from better schools and public services?

    Personally my take is a libertarian one, so I am not here to debate how I think it should be done. I was a corrections officer in Illinois for many years and am totally in awe everytime someone says they have a right to something and yet will watch and vote for folks that say they will give it to them and yet blatantly not fund it. So until there are adults on both sides of the problem there will be no solution.

    Just my point of view, nothing more. I did enjoy reading your take

    Don

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    1. Dear Don,

      I am not opposed to taxing upper-level retirement income, but I bet retired members of the Civic Committee of the Commercial Club of Chicago, the Civic Federation, Illinois Policy Institute, et al. would be opposed to having their retirement income taxed, however.

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  4. As a retired teacher I am forever frustrated with the position people, like the current governor, take about our pension plan being "too good" and they should look more like the kind of retirement plans the members of the community have. My response is always to suggest they work harder to improve their own retirement benefits instead of trying to dismantle ours. There is a lot of animosity directed toward public employees simply because they did the hard work to benefit workers and their families.

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  5. Llilly, Well said. I would also like to add that as a retired teacher and now widow, I lose the social security I paid before I went into teaching, as well as my late husband's, even though he paid into it his entire life (passed at 52). Millions of teachers (donated) money to ss that they will never see.

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    1. In regard to your unfortunate situation, if you want more information about the Government Pension Offset and Windfall Elimination Provision, click on the GPO/WEP link under the masthead of this blog.

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  6. Glen--I just attended a "Crisis in IL" meeting, at which Bobby Otter--from the CTBA--spoke--the very same solutions given by the CTBA years ago--over & over again, particularly at that last hearing (held July 3rd at the Bilandic Bldg.--guess they thought people wouldn't come, this being the day before July 4th--but, no--overflow crowd)held by "The Committee of Ten," chaired by Dem. Sen. Kwami Raoul
    (he who most recently voted yea on the latest "Grand Bargain" bill), w/ CTBA Exec. Director Ralph Martire citing the solutions. Everyone--the G.A. does NOT want to solve this...not one iota. The money would come out of the pockets of corporations & those who made billions from their corporations (RE; the progressive tax as one part of the solution).
    Does anyone else reading this find it "off" that Caterpillar--in all of its profitable years, STILL laid off large #s of workers? &, now, they are being investigated by the Feds for tax evasion? AND the CEO was forced to resign (w/surely a GREAT severance package, however). And--for the last cut--in their move to Chicago (which cuts even more workers in Peoria)--today's Tribune is looking at the possibility of garnering some big, fat Cat contributions to Chicago charities, such as the Greater Chicago Food Depository. (I think Cat had best contribute to whatever food depositories, etc., are in their hometown, seeing as, most likely their laid-off workers have had to make use of them.)
    What must, at this point, be done? Elections are always coming up--PRIMARY any DINOs (check Fred Klonsky's Blog to view the screen vote in the last "Grand Bargain" bill) w/Bernie Sanders & Elizabeth Warren-style candidates, & do it the way Bernie's campaign collected money--from we, the people. More than past time to think globally, act locally.

    Also--to the We are One Coalition--no more giving $4 million to any G.O.P.primary candidates (Dillard)--especially not one who was the IL Chairman of ALEC (the American Legislative Exchange Council). Finally, should you readers not be aware of ALEC, you'd best Google it, make yourself aware & then tell everyone else you know.
    ALEC--buying legislators since 1973, & largely responsible for our current state (& national) set of affairs. And still going strong, in part due to the ignorance of the public (by way of NO coverage by msm).

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  7. World Income Owned by U.S.: 48%
    Source: Paris School of Economics - The World Top Incomes Database, Credit Suisse - Global Wealth Datebook 2013, J.P. Morgan Asset Management
    Latest income data: U.S. 2012. Income excludes capital gains.

    Latest Share of World Wealth Owned by Top 10%: U.S. 74%
    Latest wealth data: U.S. 2010

    Data are as of 11/25/13

    Average family income, excluding capital gains, adjusted for inflation (2012):
    Bottom 90%: $30,439 (down -10.7% from 2002)
    Top 5-10%: 130,990 (up 2.6% from 2002)
    Top 1-5%: $216,947 (up 6.1% from 2002)
    Top 0.5-1%: $441,423 (up 11.3% from 2002)
    Top 0.1-0.5%: 837,377 (up 18.2% from 2002)
    Top 0.01-0.1%: $2,782,303 (up 29.5% from 2002)
    Top 0.01%: 21,569,156 (up 76.2% from 2002)

    Source: The Wall Street Journal

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  8. The banks need to be told that they will not be receiving interest on state debt due to budgetary constraints. No wonder banks make substantial contributions to political campaigns! Legislators sure have no problem taking away pensions - banks and legislators have robbed the public enough. Their time is up.

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  9. What did state policymakers do instead?

    They shifted the state's normal costs to the pension systems to local school districts. They created a Tier III defined-contribution savings plan option for new teachers and Tier II teachers. They ignored the fact that current Tier II teachers are contributing too much to their pension plans (This will cause serious Social Security problems in the future for these teachers and the State of Illinois!).

    They will continue to increase the inequities that have existed in Illinois for years (budget cuts across the board for the middle class and poor and more corporate welfare for the wealthy elite). They will continue to blame public employees and retirees for the state's budget problems, as if the Illinois Supreme Court decision never happened. The immoral liars and thieves among the General Assembly still want to repeal the Pension Protection Clause as if the Illinois Supreme Court decision had never happened... In short, it is much easier for liars and thieves among the Illinois General Assembly to continue their charade of political posturing and scapegoating public employees and retirees then to address the revenue and pension debt problems they have created and ignored in Illinois.

    ReplyDelete