Pension side of state's financial picture still waiting for reform

During his first year in office, Gov. J.B. Pritzker was able to attain numerous legislative wins, including everything from legalizing sports betting and the recreational use of cannabis to passing a General Fund budget through the legislature with bipartisan support. Unlike the majority of his predecessors, he worked to pass various new revenue sources to support the modest year-to-year increases in spending he proposed. Heck, he was even willing to tackle thorny issues fraught with political danger - like the need for major tax reform to address the state's structural revenue flaws, which have been the primary driver of Illinois' long-standing General Fund deficits.

In anticipation of having to prepare his second General Fund budget come this January, the governor put everyone on notice that state finances may well dictate leaner times are ahead. Sure, he is working with the General Assembly to amend Illinois' constitution to permit a graduated rate income tax, which as proposed would generate some $3.6 billion in new annual revenue, but that amendment won't become law unless it's ratified by voters in the 2020 general election, and if ratified won't start raising revenue until halfway through FY2021. That's quite a ways off.

Meanwhile, on an inflation-adjusted basis, revenue growth has been flat from every major tax Illinois imposes at the state level - other than the personal income tax - for two decades. And the only reason revenue from the personal income tax has grown in real terms over that sequence is that the rate was increased. If it had been left at the 3% level that pertained in FY2000, personal income tax collections would be less today in inflation-adjusted terms than they were then.

Then there's the infamous pension ramp. You know, the law passed in 1995 that created a ridiculously backloaded schedule for repaying the state pension systems for the huge debt Illinois decision-makers in both parties incurred by intentionally underfunding those systems for generations. Over the next three fiscal years, those pension debt service payments are scheduled to jump by a total aggregating more than $1 billion, or more than double the rate of inflation. That would challenge even a well-designed, modern tax system - which Illinois decidedly does not have.

Recognizing this rather stark fiscal reality, and citing, among other things, the need to cover some $7 billion plus in unpaid bills that are anticipated to carry forward into the next fiscal year, the Pritzker Administration requested each state agency prepare a budget for the coming fiscal year that included a 6.5% cut from year-to-year maintenance levels. Pritzker's Administration also directed state agencies to identify "two significant savings or efficiency" recommendations, and to identify cuts in boards and commissions.

Because of his early legislative victories and straightforward leadership on difficult issues like tax reform, pundits generally acknowledged Pritzker's first year in office was highly successful. Of course, pundits get more hits on their blog pages and retweets of their pithy insights when they find fault with the actions of elected officials than when those actions are reviewed in a positive light. So it should come as no surprise that many are treating with cynicism the governor's recent directive to state agency heads to plan for a potentially difficult budgetary time in fiscal year 2021.

Except the fiscal challenges facing Illinois are so clear and well documented that this cynicism is simply unwarranted. To resolve Illinois' fiscal shortcomings sustainably, the state must both reform its tax policy as championed by the governor, and reamortize its pension debt to create a rational, affordable payment plan that builds the health of the pension systems every year. Either action by itself won't fix what ails Illinois. And until both reforms are on the books - the state will continue to struggle fiscally.

Ralph Martire is Executive Director of the Center for Tax and Budget Accountability, a bipartisan fiscal policy think tank, and the Arthur Rubloff Professor of Public Policy at Roosevelt University. rmartire@ctbaonline.org