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Report recommends biting the bullet on pensions—finally Something along the lines of the Civic Committee's “Restore Illinois” recommendation appears to be the state's best shot at staving off disaster.

Crain's Chicago Business

Friday, February 8, 2019  |  Article  |  Joe Cahill

Pensions (70)

Give the folks at the Civic Committee of the Commercial Club of Chicago credit for a comprehensive approach to solving Illinois’ financial and economic crisis.

The “Restore Illinois” plan released earlier this week touches every base, from pension shortfalls to tax hikes, local government consolidation and workers' compensation reform. But the plan revolves around roughly $6.4 billion in new taxes to close Illinois’ annual budget deficit, pay overdue bills, establish a rainy-day fund, and eliminate the gargantuan pension funding gap that’s strangling the state.

It’s telling that such a proposal comes from leading downtown business executives, who wouldn’t stump for tax hikes in ordinary circumstances. But Illinois’ circumstances are far from ordinary. The gap between pension obligations to state employees and funds available to cover those payments is $130 billion and growing. The structural operating deficit is projected to rise from $2.8 billion next year to $3.3 billion in 2024. The state’s credit rating is teetering on the edge of junk status, and fiscal uncertainty is undermining business confidence in the state.

What’s more, options for defusing the crisis are limited. Democrats with little interest in true fiscal reform control the governor’s mansion and state Legislature. A state constitutional provision blocks reductions in promised pension benefits.

In light of all that, something along the lines of “Restore Illinois” appears to be our best shot at staving off disaster. The plan would raise revenue for debt reduction by adding a percentage point to personal and corporate income tax rates, taxing retirement income, and levying sales tax on more services. It also proposes $2 billion in spending cuts.

Some $2 billion of the additional money would be allocated to supplemental annual pension contributions to stop growth in the funding gap and save billions by fully funding the plans sooner. Another $1 billion would go toward building a reserve fund, $1.5 billion to paying overdue bills, and the rest to covering the operating deficit.

As my colleague Greg Hinz wrote on Feb. 5, the plan bows to reality. Yes, a better approach would be to amend the constitution to allow reductions in pension benefits. But such an amendment is a nonstarter under newly elected Gov. J.B. Pritzker and Illinois House Speaker Michael Madigan, who answer to public employee unions unwilling to countenance any benefit cuts.

Still, the proposal could be improved. It doesn’t go far enough in taxing services, for example, suggesting only that the sales tax be extended to enough services to raise $500 million. But Illinois could bring in $1.2 billion by taxing all the services taxed by Iowa, researchers at the Illinois Commission on Government Forecasting & Accountability estimate. The plan also proposes eliminating estate taxes and portions of the franchise taxes, which raise a combined $495 million. The group argues these taxes make Illinois an outlier among the states, but they smack of special pleading. Keeping those taxes while expanding the sales tax further would generate more than $1 billion, creating wiggle room to trim the income tax hike.

The plan takes only a vague swipe at spending cuts. Half its proposed savings would come from unspecified “operational improvements.”

Most important, the proposed tax hikes come without strings or an ending. Although the plan says Illinois should “consider rolling back the recommended tax increases” when a reserve fund is established and overdue bills paid off, it leaves the matter to politicians’ discretion. That means lawmakers could spend the additional money as they see fit, in perpetuity. We know how well that works.

Rather than increasing Illinois’ basic income tax rate, I’d rather see a separate surtax of limited duration. And the money raised should go into a restricted account, untouchable for any purposes other than paying down debt and funding pensions. When those objectives are achieved, the surtax should expire, and free taxpayers from the legacy of Illinois’ fiscal mismanagement.