Finding Revenue in Illinois...Hey, What's That?

REPEAT - Illinois, You Also Have a Solution

Let’s – just for a moment – forget the current pensions, Tier One, Tier Two, and the pension protection clause.  Let’s concentrate on the problem for once.  Let’s speculate on a solution that does not create a constitutional conflict or an egregious punishment of the entire public sector for the sins of previous administrations.

History: In January of 2011, legislators in a lame-duck General Assembly passed a temporary income tax hike, one that was described by supporters as an immediate palliative to the state’s ailing finances.  You might remember that the plan passed by the barest of margins, and not one Republican backed it in the House or the Senate. Opponents warned that businesses would leave the state in droves.  Proponents promised it was temporarily necessary.  After his signature, Quinn proudly stated, “It’s important for their (citizens) state government not to be a fiscal basket case”  (http://www.huffingtonpost.com/2011/01/12/illinois-income-tax-increase_n_807801.html).  Agreement all around, still.

Problem: The same reports in 2011 correctly identified an expected increase of nearly $7 billion per year, but even that was not enough to stop the fiscal bleeding of the state.  Legislators found themselves cutting Medicaid benefits, adding taxes on cigarettes (not passed during the original income tax hike), and bemoaning the evaporation of the additional tax hike money.  Important note:  Budget director for Governor Quinn, Jerry Stermer identified the 1995 ramp to pay back the unfunded liability the greatest impediment to the state’s fiscal health. “The state now finds itself in the midst of those years with increased pension costs. Quinn budget director Jerry Stermer calls the payment plan ‘fiscal suicide.’ He notes the state's required contribution has nearly tripled: going from $1.71 billion in the 2008 budget year to $5.09 billion in the budget year that starts July 1” (http://articles.chicagotribune.com/2012-05-28/news/ct-met-illinois-budget-20120528_1_pension-payments-income-tax-tax-hike).  That’s last year.  That’s when the bill was only $83 billion.

Solution:  Make the 2011 income tax hike permanent.  Designate the additional 2% in income taxes (approx. $7 billion per year) solely for paying down the unfunded liability, which is now $96 billon. Discard/repeal the failing and fiscally injurious 1995 law called the “Ramp.”  Secure enough funding through the sale of pension bonds to erase the entire unfunded liability at a suitable rate (that’s right, $100 billion at, say, 6.5%).  This will turn “soft” debt into hard debt and a guaranteed payment for let’s say 25 years in an amortized and consistent method to pay back bondholders. It can be done.  I’ve seen the numbers.  A respected, senior Representative in the General Assembly suggested even a moderate growth rate in the State of Illinois could accomplish an end to the unfunded liability. You look, too.

                 Pension Bonding to Solve Pension Crisis

Year	Tax Revenue @ 2.5% Growth (in millions)	$100 Billion Pension Bond Payment @6.5% Rate (in millions)
2013	$7,000.00	$8102.49
2014	$7,175.000	$8,102.49
2015	$7,354.375	$8,102.49
2016	$7,538.234	$8,102.49
2017	$7,726.690	$8,102.49
2018	$7,919.857	$8,102.49
2019	$8,117.854	$8,102.49
2020	$8,320.800	$8,102.49
2021	$8,528.820	$8,102.49
2022	$8.742.041	$8,102.49
2023	$8,960.592	$8,102.49
2024	$9,184.607	$8,102.49
2025	$9,414.222	$8,102.49
2026	$9,649.577	$8,102.49
2027	$9,890.817	$8,102.49
2028	$10,138.087	$8,102.49
2029	$10,391.539	$8,102.49
2030	$10,651.328	$8,102.49
2031	$10,917.611	$8,102.49
2032	$11,190.551	$8,102.49
2033	$11,470.315	$8,102.49
2034	$11,757.073	$8,102.49
2035	$12,051.000	$8,102.49
2036	$12.352.275	$8,102.49
2037	$12,661.082	$8,102.49
2038	$12,977.609	$8,102.49

                          TOTAL                             $252.081.96                $210,664.74

Benefits:  Bond companies will now have a commitment to timetables and repayments they do not have from Illinois as of yet.  They may be willing to assist in this re-amortization of expenses.  The annual payment will be known and unchanging as we the State move forward year by budgetary year.  In time, as we crawl out of this recession, the economy in Illinois (number 5 in GDP in all 50 states) will gear up and we will see a lessening of expense against a growth in revenue.  There would be no unnecessary constitutional fight, and public sector employees’ contributions and good works would be honored.   That part of the recent proposals which ofers a dubious planned promise by those in Springfield “to pay or be taken to court” would be a reality with a timetable for full payment!  The part of the annual budget devoted to normal costs in pension obligations could become just that – the normal yearly costs.  By the way, those costs are down this year, and do not always outpace the preceding year’s costs.  If a battle looms to make an increased income tax hike permanent, why not accomplish something which has bedeviled the State’s economy long enough.  Freeze the COLA and face a potential constitutional court battle? OR  Freeze the income tax increase until later and pay down the debt with revenue already there?

This constant battle to seek huge fiscal solutions by making a thousand small, and possibly unconstitutional cuts has bond houses reeling as much as fellow retirees and public sector workers.  Public sector organizations like We Are One have already stated they’d be part of the solution, but they will not be held responsible for the problem they did not create.  They did not create the problem that is Public Law 88-593.  Representatives Nekritz, Cunningham, Biss, and others did not create the problem that is Public Law 88-593.

Let’s fix the problem: Public Law 88-593.