By ALAN J. ORTBALS
Last month, the Illinois Supreme Court smacked a big, bright, UNCONSTITUTIONAL stamp on the legislature’s 2013 pension fix law. It wasn’t a mixed review. The decision was both unanimous and harsh. The legislature has tried to lie their way out and wriggle their way out and neither has worked. So, what’s a state to do?
This pension problem is nothing new. Gov. Bill Stratton was first warned about underfunding in 1959. For more than 65 years the legislature has been borrowing from the pension funds rather than raising taxes or cutting spending. Talk about a slow-motion train wreck!
Twenty years ago, that pension debt was $17 billion which seemed like a serious sum at the time—serious enough to get the legislature to act but not serious enough to devise a real solution. 90 percent of state spending went to health care, education, social services and public safety and the state’s 3 percent flat rate income tax wasn’t enough to pay the bills, so they used accounting gimmicks to make it look like it went away, figuring they’d be out of office by the time the bill came due.
The solution in 1995 was to enact what they called a “pension funding ramp” that back loaded the cost so the payment schedule looked like a hockey stick. Initially the payments were manageable but they eventually ballooned to astronomical proportions. That solution was so ineffective that by 2008 when the stock market crashed, taking pension funds with it, Illinois’ unfunded liability had grown from $17 billion to $54 billion. And, of course, the handle of the hockey stick was still swinging our way.
Now the pension debt stands at $111 billion and, with the Supreme Court’s decision, it’s clear that we can no longer game our way out of this. Winston Churchill said, “You can always count on the Americans to do the right thing, after they’ve tried everything else.” Maybe it’s time the Illinois Legislature does the right thing.
The Illinois Center for Tax and Budget Accountability, an Illinois think tank, has laid out a sensible and balanced 6-point plan to bring Illinois back to solvency.
1) Re-amortize the pension repayment schedule that sets a level-dollar annual payment and make those payments not just legally binding but legally enforceable by the pension systems.
2) Expand the sales tax base to include consumer services. This will generate more stable, less volatile revenue and better align tax policy with the modern economy. Of the 47 states with a sales tax, Illinois has the narrowest base. But only consumer services should be covered in any base expansion. Taxing business-to-business service transactions would result in highly inefficient and economically distorting tax pyramiding.
3) Increase the personal income tax rate from its current 3.75 percent to between 4.5 and 4.75 percent.
4) Start taxing retirement income. Illinois is one of only three states with an income tax that broadly excludes all retirement income from the state income tax. The Center for Tax and Budget Accountability recommends phasing out the exclusion for retirement income as taxpayer income increases to ensure that fixed-income/low-income seniors are not harmed economically.
5) Conduct a thorough review of tax expenditures. Those that do not generate demonstrable public benefits, or which do not serve a legitimate tax policy purpose, should be eliminated.
6) Provide some targeted tax relief focused on low and middle-income families.
I think that’s an honest and forthright approach. So, now that we’ve exhausted all other alternatives, can our leaders be counted on to do the right thing?
I often tell people you really only need three people to get something done in Illinois: the Speaker of the House, the President of the Senate and the Governor. If you have those three, everyone else goes along.
Come on, boys! It’s not as hard as you’re making it look. No more political maneuvering, no more gaming the system; no more dancing around the problem. Get the job done!
Alan Ortbals is president and publisher of the Illinois Business Journal. He can be reached at email@example.com
By ALAN J. ORTBALS