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Tuesday, April 12, 2011

Solving the Illinois pension deficit

Illinois has the largest unfunded pension liability of any state in the nation. The deficit currently stands at $79 billion. This is money due to the pensions of the people who work for Illinois state government. The employees have been paying their share, but the state has not. This happened over a period of many years because our elected officials have been putting off paying the employer's share of the pension contributions.

To put it another way, instead of raising our taxes all these years to keep up with the business of government, the governor and the legislature have been able to use the pension money they should have paid for everything else in the budget. That way, they got to go home at the end of session and tell their constituents, "look at all these wonderful things I've done for you without raising your taxes." But now the pension deficit has turned into an scary monster and the chickens have come home to roost.

So, the question has been asked, what should Illinois do about this deficit. Some people seem to think reneging on this obligation is an option. It is not. The only option is to make good on this debt.

The University of Illinois Institute of Government and Public Affairs has studied the issue and released a paper that addresses the debt and how to treat public pensions going forward. (With the emphasis on going forward. Also, I'm still reading it.)

Until Illinois goes with a pension plan for its employees where the employer has no contribution obligation (which may never happen), the state should pay 100% of its current contribution each year going forward. This money should be paid out of revenues for each year without any borrowing. It's just got to be done that way. To the state's credit, it did make a partial payment this year. But, it borrowed money to make the payment. The borrowing has to stop. The taxpayers will never break even if the state continues to take on new debt to fund its current pension obligations.

Paying the past due amount is going to be very hard and painful. Paying back $79 billion may seem impossible. But, because those pensions are protected by the state constitution, it's my belief that no court in the land will let the state walk away from it. Figure out a period of time (10 years, 20 years, whatever), and start making annual payments on the pension deficit. Again, these payments should be made out of current revenue and not by taking out new loans.

One of the proposals offered by the U of I is to cut spending on services the state provides. Unfortunately, there may not be enough cuts available. Then it becomes obvious that we're in for another tax increase on top of the huge increase we took on as of January 1st of this year. Remember, we taxpayers enjoyed all those years with all those government benefits and services without a tax increase to pay for them. We're going to pay now.

Illinois currently does not tax pension income. That is, once anyone starts drawing a pension in Illinois, that money is tax free. It has been suggested that we reverse that and start taxing pensions. I think that is a great idea. Tax all retirement income at the current rate and apply that money to pay down the $79 billion.

Disclaimer: I know nothing of how these things work. This is my my opinion, and it may seem simple, but I firmly believe simple is better.

Posted by Marie at April 12, 2011 8:30 PM

Comments

Government workers are a convenient scapegoat on whom politicians can deflect their constituents wrath. Most of those workers took below market salaries in lieu of job security and other benefits that were cheaper at the time. Health insurance was cheap once. Now that those benefits are worth something, we want to take them away? No matter how easy it is, it's WRONG.

Posted by: Rob Author Profile Page at April 13, 2011 3:27 PM

Don't think I worded that right. Meant to say they took job security and other benefits that were cheaper at the time in lieu of full market salaries. They took less to keep our taxes down. In return, they got other benefits that were cheap once. Seemed like a good deal for everyone at the time.

Posted by: Rob Author Profile Page at April 13, 2011 6:02 PM

Rob, I understood your first comment. But, thanks for the clarification as others might not. You bring up a point that is never discussed around here, but should be. I think it's very important to understand the history when trying to figure out the present and future. Thank you.

Posted by: Marie Author Profile Page at April 13, 2011 9:15 PM

Rob -- that's a pretty good take on public workers. From the rhetoric we hear, you'd think that anyone working in the public sector is an otherwise unemployable bum whose "work" days consists of napping, watching TV, and emptying out the public till--all while waiting for super-inflated, gold-plated pensions to kick in (at the same time, people working in the private sector are heroes for doing an honest day's work for an honest day's pay--just by virtue of not being paid directly out of taxpayer funds).

Marie, I agree about taxing the pensions. It's tough medicine, but that's what's needed if the system is going to survive. Illinois sounds like another planet from California, where the Republican minority in the Legislature is blocking the governor's request to have a statewide vote on extending tax increases that are far smaller than the ones that were passed there. Our pensions systems are in trouble, too--largely because of rules put in place during boom times that made them unreasonably generous (and also because for a long time the main state pension system was so flush with cash that University of California employees didn't need to contribute a dime to the fund).

Posted by: Dan Author Profile Page at April 16, 2011 4:19 PM

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