HB 689: A Graduated Tax Plan for Illinois?

Reprise:  My very wealthy Republican friend Ernesto stops by on occasion to say hello and to school me on the indolence of the underserving masses.  This conversation posted in 2014 might well have been posted yesterday. Rep. Lou Lang’s IL HB 689 has provided Illinois a possibility to move beyond an antiquated and injurious flat tax.  Part of the fallacious and emotional arguments presented by opposing forces like the Governor is found in my talk with Ernesto.     

Nothing better than this?

Graduated or Gradient? – Looking for Accuracy in a Fair Tax for Illinois

“This season affects me most – psychologically,” my wealthy friend Ernesto uttered between sips of cognac the other evening. 

“It has been a brutal winter, Ernesto,” I offered hopefully, “but the end is coming with each day’s increasing sunlight.”

“I am talking taxes, my friend,” Ernesto responded, glowering.  “I am imprisoned by your government’s exasperating 33% income tax.    And, I suppose, you are now part of that progressive rabble that wishes the same - a graduated income tax in Illinois?”

“Goodness, Ernesto.  Thirty-three percent indicates a significant income.  I am happy for your success.  May I ask what portion of your income is subject to this rate?”

“Why, all of it…just as you and your union bosses would wish in Illinois.”

“Actually, Ernesto, if Illinois were ever to move to a “Fair” tax system, one you would call progressive or graduated, the increases in taxation would occur as they do on the federal level – at thresholds or gradients.  In other words, Ernesto, if you achieve $3000 above the threshold for 33% taxation (which is $226,850), you pay 33% on that $3000, not your entire earnings.

“In fact, Ernesto, you pay your federal tax like everyone else for all of our services for each of the thresholds as you move through them, my friend.  That means you pay only 10% on your first $18,000, 15% on your next $56,000, 25% on your next $75,000, and so on.  You don’t fall into a category where you pay 33% for all of your earnings.  That’s why I use the term gradient tax system (or fair tax) rather than graduated when I talk about it. “

“You don’t know my pain…”

“In truth, Ernesto, you pay the same percentage tax as me until you move well beyond me…and then you pay extra for only those amounts above our joint threshold.” 

“I see.  Don’t you have anything better than Hennessey?  Paul Ferrand or Skye?”

“Sorry, no.  And that is how a fair tax would work in Illinois, Ernesto.  We, both of us, would be taxed at higher levels for the amounts we earned above thresholds of income, not for all of it.”

“Ahhh, my friend.  But you’re still stealing from me for being successful, are you not?”

“Well, not actually, Ernesto.  In truth, you and I might actually be stealing from the greater population in Illinois who pay more dearly for their services – education, protection, healthcare, roads and transportation – than we ever will.  And, if we’re not stealing, we’re certainly getting a better deal for it all.”

“Ridiculous.”

“Not so, Ernesto.  The average earner in Illinois pulls in $47,485 annually.  At 33%, I know that you pull in much more, and I’d venture nearly ten times that amount.  Nevertheless and without denial, let’s review our numbers.  Suppose Mr. Average needs a new car for his family and purchases a solid sedan at $25,000.  I see by your scowl that such a concept is impossible.  Will you accept $40,000? “

“Only if I have to…”

The taxes on this family’s precious purchase will be several – New Vehicle Tax, Cook County Home Rule Tax, Cook County Sales Tax, possible Chicago Home Rule Tax…and others.  Those taxes, Ernesto will run to nearly $3,000 – or almost 7% of the earner’s annual salary. “

"Stay poor, my friend"

“And…?”

“For an income earner like you?  A mere .6% of your salary.   Ernesto, you would need to purchase at least ten of these vehicles to begin to feel that same impact on your income.  That is something, I might add, you would not and never need do.  But it does illustrate a significant difference in our relationship with tax requirements, doesn’t it?  We gest away with a lot, my friend.

“Add to your and my advantages the costs of milk, gasoline, clothing.  Costs of living and taxes for these average workers, Ernesto, drain huge portions of their ability to live, and we are not talking disposable income. 

“Indeed, what you and I pay for the protection of police and fire, for our schools, for transportation, health services, and other benefits is a steal, Ernesto.  Don’t we owe it to make it more even?”

Silence.

Note to self: Purchase Paul Ferrand for next get-together.

Simple Answers: and Some Serious Questions

Simple Answers: and some Serious Questions

My blogger friend and I went to Benedictine College the other night to listen to three members of the General Assembly and the currently appointed State Comptroller explain their perspectives on Illinois’ current budget morass.

We had to fill out questions beforehand on small cards and submit them for approval before the program really began. 

Governor Rauner appointed Leslie Munger to her current position as State Comptroller after the death of Judy Baar Topinka.  Munger will be running against Democratic Representative Susanna Mendoza (1^st District) in November to retain the office. 

Senator Michael Connelly and Representatives Ronald Sandack and Grant Wehrli were also present; Sandack sitting in for Jeanne Ives who was unable to attend.

The opening and ending of the program was telling for anyone who happened to be a retired state worker there. 

It began with a question of how to reform pensions and ended with a general question of “If you ruled the State?” – a variation on Toney Bennett’s song but without the “Every man would say the world was his friend/ There’d be happiness that no man could end”.

Nope.  Not in their world.

Pension reform is a must – especially for those who might be coming aboard to work in the public sector.  “We’ll need opt outs, buy outs, 401k’s, choices between, options moving forward, reductions in costs, curtailments according to actuarial adjustments…”, they all affirmed.

Good answer.  But, serious question:

 If the income of new workers is gone from the necessary investments in TRS and the state continues to make insufficient payments into the public pensions, might the pension system become broken?  And if, according to the Illinois Supreme Court, the state still owes that money, won’t the people of Illinois be obliged to pay for it by sale of state owned property or higher taxes? 

Yet, they all confessed one way or another the Illinois Supreme Court had made lucidly clear that current Tier One and Tier Two public sector workers and teachers are guaranteed what they were promised once the began their employment.

Representative Sandack described how the conversations in the Capitol Building had undergone a unreserved shift from an ever present concern for pension-reform-now to a subdued notion no longer discussed. 

In the end of the evening’s program as petty “philosophical” dictators, not one of them thought to attack the strength of the current Pension Protection Clause.  Lots of other bullet points, but not the Pensions. 

During the evening, Comptroller Munger warned the audience that the current payment for pensions and pension debt would balloon next year to eat up even more of the state revenue – if there actually was a budget and any state revenue.

Serious question: My friend had sent a note asking about re-amortizing the debt like a sensible household in order to eventually reduce annual debt payments rather than pay out more and more.  It must have been lost on the way to the podium. 

Representative Grant Wehrli declared that the lack of local control sought by Governor Rauner in his Turnaround Agenda had forced many local districts to labor under the pension pick-ups which were so injurious to local taxpayers. 

Serious question: Aren’t pension pick-ups really a negotiating strategy and not mandated by anyone; in short, an agreement between the local teacher or workers union to accept another form of raise rather than direct monetary remuneration?  

Comptroller Munger cited her handout, which demonstrated for those of us unaware just what our state finances might look like if we were all facing the same tsunami of bills that she faces daily.

STATE FINANCES	HOME FINANCES
$7,000,000,000 Illinois bill backlog	$7,000 Bills on kitchen table
$2,000,000,000 Unpaid bills due to impasse	$2,000 Bills in the mail
$110,000,000,000 Unfunded pension liabilities	$110,000 Credit card debt
$100.000,000 State’s Daily Revenue	$100 In your bank account

And she reminded all of us, those unpaid bills come with an additional cost.  All the postponed bills to health services, hospitals, or other businesses (that survive the impasse) must be paid extra interest for the state’s late payments.  She suggested the amount is generally one percent, but in some cases more dependent on time and arrangement.  And who pays this?  It’s an extra we taxpayers pay for the impasse.

Serious question:  When the Comptroller received a rousing applause for the postponement of salary payments to the members of the General Assembly as a notice that “they have not done their duty and passed a budget,” no one wondered if she had penalized those same applauding taxpayers with an additional payment for her symbolic actions?  State payroll, in fact, does not meet the threshold for an interest charge, so while there is no timetable for when a legislator might be paid they can count on nothing extra in the waiting.  None of the three legislators in the room were dependent on the income from their elected positions. 

Serious question:  And when Comptroller Munger says this action – stopping salary payment to legislators – will help with nearly $1.3 million per month to be used for possibly human services, hasn’t the recent report by the Illinois Fiscal Policy Center indicated that $billions are being jeopardized each month by this impasse which will result in the permanent closure of programs for the poor?

Shortly after that, and ignoring hypocrisy, someone’s redacted question touched upon the attempt by Representative Lang of Skokie to pass a law (HB689) for a progressive tax in the state of Illinois. 

Representative Sandack, an exhaustedly animated speaker, flailed throughout his moments on the microphone decrying the bill as a blatant attempt at class warfare.  He warned us all that the bill would force those if us in the room (white middle/upper-middle class) we would pay more in the end.  Why?  “Because all the millionaires will leave the state of Illinois and we will become the ones left to pay for the programs.” 

Serious question: Where will they go?  The nirvana of Indiana, which has a higher flat tax than we do?  This seems to suggest “we” would have to pay for “them.” Isn’t that class warfare?  And which states would they run to?  There are only six left?  Michigan (much higher tax)?  Colorado (much, much higher tax)?  Utah?  Pennsylvania?  Massachusetts (way over 5%)? 

When questioned about whether or not Governor Rauner might be causal to the pain inflicted on our current situation, Senator Connelly had a moment of extreme emotion.   Exclaiming that Rauner was not the problem, and instead it was Madigan, Connelly reminded all of us that the man did not have to take this position.  He did it for the love of his state.  He reminded us that he had negotiated by taking Right to Work off the table in his Turnaround Agenda, although the specific campaign for Right to Work was never an integral part of the original proposal. 

“He’s only been here 14 months!!”  Connelly shouted. “You can’t blame him for this.”

Serious question:  What will Rauner additionally be able to “make better” for all of us in another 34 months?  One shudders to think of it.

Finally, Connelly and the others responded to a question regarding the inability of the state of Illinois to declare bankruptcy but wondering what might happen on the local levels.

They all agreed that locals should be able to declare bankruptcy.  Senator Connelly had it on good opinion that there were villages and cities on the south side of the city where this would only be a matter of very short time, where their revenues were so paltry that there were no longer services for the people.  

"Think of a city without policing, without any safety or basic services?" Connelly suggested.

The other Representatives agreed as the Comptroller nodded sadly.  And these impoverished places, like Dixmoor, Harvey, Posen, Midlothian, Chicago Heights, Ford Heights, etc., are the same places where the greatest amounts of human social services are being denied as part of the budget impasse. 

Serious question:  Is there something morally unacceptable about a battle between two entrenched parties that results in the obliteration of the least empowered and the most marginalized of our citizens? 

"Do unto others" was not a suggestion; it was a command.

Double Down: A Sinking State

Think of it as a gift to Merrill Lynch...

Double Down: A Sinking State

My banker called the other day and suggested that I move my meager savings out of long-term bonds and into something providing a bit more in returns. 

“Are you suggesting something with a bit more risk?” I responded like the old man I’ve worked hard to become.

“Well, yes,” she breathed with that subtle exasperation that comes with a financial advisor’s license.  “But long-term bond returns are dismal and projected likely to generate almost flat line benefits in the next few years.”

“Really,” I answered.  Like I comprehended string theory.

Then she added with a chuckle, “Of course if you want to jump in to secure the $480 million just issued in General Obligation Bonds for the State of Illinois, you’ll get a much better return seeing how the budget impasse has elevated the returns for a savvy investor.”

“Wait, wait,” I shot back.  “You mean with no budget our state is borrowing to make payments for services we should have already budgeted for?”

“Of course,” she smiled.  “With bonds returns falling so low, this would be the best time for a state with such a lousy credit rating to offer a general obligation bond purchase.  That’s why you’re not a financial advisor, my friend.  And the governor’s budget impasse has mantled Illinois with ‘the lowest credit ratings and the widest so-called credit spread among the fifty states.’”

http://www.reuters.com/article/us-illinois-bonds-idUSKCN0US2AV20160114

 I summoned my entire financial prowess: “So, it’s good, maybe, right?”

“Of course not.  It’s Illinois, silly.  Illinois will pay more than other states who might be taking advantage of the same precipitous fall in bond returns.  But we have a budget impasse. That’s why Illinois has been holding back on issuing bonds for so long – about two years, I believe.  When the ratings companies cut your credit rating you have to pay more for yield premiums in order to attract investors.”

“So the state pays more to borrow?”

“Good!  Now you’re beginning to catch up.  And that means you and all of us taxpayers pay more because the ratings continue to fall as we march on through this treacle called the budget impasse.  Ten months and counting.  In fact, Bloomberg suggested that for every $1 billion borrowed by Illinois, we’d all pay an extra $175 million over the 25 years for investor returns.”  

http://www.bloomberg.com/news/articles/2015-11-05/illinois-faces-millions-in-extra-debt-costs-from-budget-fiasco

“So, Rauner’s austerity and conservative compassion…?”

“Yep.  It’s punitively expensive, and it will be for a very long time.  Not just for the regulars like you who are lucky enough to have an income, but even more for those without.  This guy wins over Madigan or he is taking no prisoners…of course the investment companies do very nicely.”

“But how can we go on like this?”

“Another good question.  Now I feel the empowerment you teachers all love to talk about.  If this is a teachable moment, why not go to the Curious City segment on WBEZ presented by Dan Weissmann trying to sort out where the money goes if there is no state budget, if there is no money.

You can read the transcript or listen to the podcast: either way it’s probably scarier than any Edgar Allen Poe story you taught.”

https://www.wbez.org/shows/curious-city/illinois-has-no-budget-so-where-do-state-tax-dollars-go-anyway/3197f0ba-ce77-44c6-9180-04088ccc8f76

Pension Thievery - Stay Vigilant

Pension Thievery

HT/Bull

An unsettling read in a very recent post on MSN’s Marketwatch by Elliot Blair Smith might be worth your while.  It’s a reminder of how readily even a massive pension fund can be undermined, pensioners victimized, and how political influence by the very wealthy and powerful can be purchased at the highest levels.

http://www.msn.com/en-us/money/retirement/how-the-teamsters-pension-disappeared-faster-under-wall-street-than-the-mob/ar-BBrkoPX?li=BBnbfcL&ocid=HPCDHP

Thus far, the Illinois Pension Protection Clause of Article XIII, section 5, has withstood the various unconstitutional assaults by the General Assembly, political influence peddlers like the Illinois Policy Institute, and hedge-fund managers like our Governor.  And, it is unlikely such mischiefs will ever cease.

On the other side of the fence – the private sector – without anything except the promises made by management, a retiree faces a very uncertain and unfair future.

In the case of the Teamsters, once a union whose pension management was considered crawling with undesirables and wise-guy corruption, federally sanctioned replacement by the likes of Goldman Sachs and Northern Trust Global Advisors  was tantamount to hiring Bernie Madoff to handle the savings of future promises to workers.

“The debacle unfolding at the $16.1 billion Central States fund in Rosemont, Illinois, is a cautionary tale for all Americans dependent on their retirement savings. Unable to reverse a decades-long outflow of benefits payments over pension contributions, the professional money managers placed big bets on stocks and non-traditional investments between 2005 and 2008, with catastrophic consequences.

Facing a devastating shortfall in fund investments, the administrators of the pension funds lobbies Congress to give them the authority to cut retirement benefits – “by up to 50% after Treasury Department approval.

“That’s close to Central States’ astonishing 42% drop in assets—and a loss of about $11.1 billion in seed capital—in just 15 months during 2008 and early 2009. And while the investment losses are not the source of the retirement plan’s unsustainability today, they accelerated the pension’s problems, and almost certainly made the benefits cuts deeper. The professionals made more money disappear in a shorter period of time than the mobsters ever dreamed of.

Trying to extricate themselves from promises made to many unions under the aegis of a single administrator, CEO’s like Joseph Hansen of the United Food and Commercial Workers Union (who earned more than $350,000 annually as he departed his office), heavily lobbied Congress to allow the cutting of pension benefits to union workers for chronically underfunded pensions.

“’The simple fact is that in order to save some of the most vulnerable pension plans trustees must be given the ability to slightly reduce benefits. This is the only realistic way to avoid insolvency and preserve as much of the promised pension benefits as possible,’” the union boss wrote in a letter urging lawmakers to allow underfunded union pension plans to cut promised benefits.”

http://www.washingtontimes.com/news/2014/dec/29/big-spending-unions-got-congress-to-approve-pensio/?page=all

Signed by Obama in December of 2014, the Multi-Employer Pension Reform Bill “empowered  any multi-employer pension fund – commonly managed by unions – to cut benefits for workers and current retirees if the plan is 20 percent or more unfunded.”

Senator Bernie Sanders immediately called for a repeal of the bill, drafting legislation with the Representative Marcy Kaptur of Ohio to stop the law’s impact upon perhaps over one million private sector workers.  The Keep Our Pension Promise Act is still languishing in committee.

Back to the article on the Washington Times:

“In another words, Congress and the president let workers who spent decades toiling away to vest in retirement programs take the hit for union managers who failed to keep pensions fully funded.

“In all, more than 10 million U.S. workers rely on multiemployer pension plans. About 1 million of those could get notices next year informing them that the pension benefits they were promised when they signed on to their jobs may be cut. Only those older than 75 get any relief.”

“The concession to union lobbying was a major reversal for Congress, which in the past steadfastly protected the pensions of workers who already had retired.

“The real point of contention is in the cutting of benefits in payment status, meaning benefits currently being paid to retirees. That’s a dramatic departure from long-standing legislation and practice that essentially says that benefits currently being paid cannot be reduced,” said Jean-Pierre Aubry, assistant director of state and local research at Boston College’s Center for Retirement Research.

“Mr. Aubry said the new law will enable multiemployer plans to make deeper cuts to pensions than the 2006 Pension Protection Act allowed. “The new legislation allows for more dramatic cuts to the accrued benefits for current workers and, notably, allows for cuts to the benefits currently being paid to retirees,” he said.

“The Multiemployer Pension Reform Act replaces many provisions of the previous law, creating an escape hatch for many underfunded pensions. The Labor Department’s list of critically underfunded multiemployer pensions shows that the vast majority belong to local unions.”

We may thank the Illinois Supreme Court for their legal and moral adherence to the carefully crafted phrase by Helen Kinney and Henry Green at the 1970 Constitutional Convention, but we must remain – all of us – vigilant in our constant monitoring of what attacks may come next, even from those we would politically trust.