Kadner: The real financial crisis in Illinois
By Phil Kadner firstname.lastname@example.org October 23, 2013 9:28PM
Updated: November 25, 2013 1:14PM
State Senate President John Cullerton (D-Chicago) committed political heresy recently by claiming that the state pension crisis isn’t really a crisis at all.
“Let me also just say that people really misunderstand the nature of this whole problem,” Cullerton said. “I don’t think you can use the word ‘crisis’ to describe it at the state level.”
He explained that the state is not close to bankruptcy on the pension thing but pointed out that Illinois is going to be facing a real crisis soon if most of the temporary state income tax hikes are allowed to expire in 2015.
And he’s right.
I’ve been telling readers for a couple of years now that the pension crisis has been blown way out of proportion.
While many of my colleagues in the news media as well as civic groups and business organizations have been demanding pension reform and shouting that the sky is falling, they’ve been looking at meteor showers way off in the distance instead of focusing on the giant asteroid heading directly at Springfield.
I say that because any pension reform isn’t going to have an immediate impact on the state budget — either the amount of money it gets or the amount it spends.
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.
“John is right, in the sense that the big problem is the loss of $5.2 billion in revenue against a budget deficit that stands today at $8.9 billion,” said Ralph Martire, executive director for the nonpartisan Center for Tax and Budget Accountability.
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.
Martire notes that Illinois has “cut spending on the four core services areas (such as education and human services) by $4.7 billion from 2009 to 2014 and that hasn’t stemmed the bleeding.”
It ought to be noted that neither Cullerton nor Martire is saying that pension funding deficits are not a problem. They are. They’re just not an “imminent” problem while the annual budget deficits are.
Gov. Pat Quinn really hasn’t helped things by holding news conferences to stress that the pension crisis is the most important problem facing this state.
If the Legislature doesn’t achieve pension reform now, the governor has basically told the public, the state is going to financially collapse.
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, Martire 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.”
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.”
Whether or not you buy Martire’s pension solution (it makes sense to me), the fact is that the state has no plan now that will address the fact that it’s spending far more than it brings in each year.
In 2014, there’s going to be a governor’s race, and any Republican is sure to make the income tax hike a cornerstone of his campaign.
I don’t know if Quinn will take the position that the higher tax has to be permanent. If he does, that would be a tough sell.
If the tax hike expires, though, you will see a real financial crisis in Illinois.
It’s unfortunate that Cullerton’s comments sparked a lot of outrage about the lack of legislative action on pension reform and very little about Illinois’ more immediate financial crisis.
Adopting a graduated income tax would take a constitutional amendment, and that likely would take years.
No one likes the higher income tax. But the fact is, no one is talking seriously about the consequences of doing nothing until 2015.
And that, folks, is how you create a crisis.