Illinois: Will It Shoot Itself in the Other Foot?

By Ken Andersen

Our dysfunctional state government has already dug itself into a very deep hole but apparently is not convinced it has reached the bottom yet. The lessons our history should teach us are not understood by those we have charged with responsibility for governing the state. But, remember, that government is the result of our actions in voting or not voting and our interactions with it.

So, we may ask, “How did we through Springfield first shoot ourselves in the foot?” From my perspective, the most glaring example is the failure to fund on an annual basis the state pension systems. Universities that use TIAA/CREF or similar systems and are covered by social security have both employer and employees’ contributions being made on a regular basis. Illinois chose to have its own pension system for state employees and teachers. While it should have made regular contributions, it chose not to do so: sometimes contributing too little, sometimes nothing. If it had contributed, the interest earned would have mean zero or minimal contributions in some years.
The result: The Pew Center on the States (New York Times, Feb. 18, 2010, p. 8) found the worst state “because they made no progress on keeping their retiree benefit plans sound...was Illinois, with a $54 billion gap between the cost of the benefits...and the amount set aside.” The state in 1995 adopted a plan to gradually fill in the gap and has repeatedly failed to do so.

The failure of Illinois to pay its bills on time results in interest charges and bonds floated to cover shortfalls result in more interest on those debts. The refusal to fulfill its budget commitments to higher education has resulted in layoffs of faculty and staff at the University of Illinois and threatens the ability to meet payrolls at other institutions.

The failure to act in a fiscally responsible manner--whether in the pension shortfalls, increased state debts, underfunding of needed social services--is a problem for every citizen in the state because it threatens the future viability of the state.

Where Are We Now?

A March 11, 2010 press release by Carrie Hightman reported, “Even accounting for inflation, state support for higher education is $212 million, or 8.7% less this fiscal year than it was in fiscal 2002.” The governor proposes another 4.1% reduction in his budget. (Note the sharp increases intuition tuition to cover previous state cuts!)

The Pension Modernization Task Force set up to suggest solutions for the much maligned state pension systems was unable to agree upon a solution. But it did find that the cost of the system to taxpayers is less than in the private sector, benefit levels compared to 85 public retirement systems are average, and any change in pension benefits for future employees will not reduce the debt for past underfunding.

Social service groups providing much of the safety net for those in need all over the state are struggling laying off staff, facing closure.
Illinois’ bond rating is “A, Rating Watch Negative” (Karen Krop, analyst with Fitch Ratings)—lower than any other state except California, which means higher borrowing costs.

The Center for Tax and Budget Accountability provided a table of the FY2011 Starting Budget Shortfall-Minimum:

• Replacement of one time FY 2010 revenues and debt: $6.265 billion.
• First installment of 5-year Debt Service on Pension Notes: $800 million
• Carry Forward of Operating Deficits of FY 2009/2010: $4.0 billion.
• Increase in required pension contribution under the Pension Ramp: $1.2 billion.
• Revenue shortfall predicted for FY 2010: $900 million.
• Total Minimum FY 2011 Starting Deficit: $13.165 billion.

Solutions?

The need is urgent, the suggestions are many, but the likelihood of meaningful action to address the need to develop a realistic funding mechanism for the state is almost nil. The Governor’s budget proposed cuts, going further into debt, and delays in paying bills. However, in delivering his budget message he also called for an increase in the state income and corporate taxes. The Republican candidate has proposed a 10% cut across the board.

Two bills in Springfield propose increases in taxes: HB174 introduced by Miller in the House and SB 750 by Cullerton in the Senate amend the Illinois Income Tax Act. One bill would increase the income tax for individuals to 5% and corporations to 7.2% while simultaneously extending a variety of tax credits for property tax, education expenses, etc. A version of the bill passed the Senate and in the House is referred to the Rules Committee. Speaker Madigan wants Republicans to sign on for some portion of the needed votes; Republicans say something along the lines of, why should we?

Most observers expect no action on taxes until the election is over. Previously it was until the primary was over. And there is always another election coming along.

Sooner or later the state will be forced to address its fiscal irresponsibility but apparently too many of our elected officials think that time is not now.
I am reminded of a conversation with one legislator many years ago who said, “The most important thing I have to think about is my reelection. Everything else comes second.” Is it time to tell them that without a tax increase—revenue enhancement if you prefer—you won’t be reelected? Only the future of the citizens of the state is at issue.

What we are facing is a problem for every citizen in the state: it is not a pension issue, a higher education issue, a number of state employees issue, it is the viability of Illinois as a state.

Prediction!

Legislative actions/inactions mean we will shoot ourselves in the other foot.