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 The Civic Federation, a Chicago-based public policy research
organization, recently criticized Gov. Bruce Rauner’s proposed fiscal year 2019
budget, calling it “precariously balanced” and disagreeing with some of the
governor’s proposals for reining in the cost of state government.
While the Civic Federation offers valid points that the state needs a better
plan to address its bill backlog and that it can’t count on a sale of the
Thompson Center for revenue, the organization’s proposed taxation of retirement
income and extension of the sales tax to services would harm Illinois’ economy
and taxpayers.
The Civic Federation took issue with certain aspects of the governor’s budget
plan, specifically:
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A plan to save $825 million by properly aligning local
pension and retiree health insurance costs for teachers and university
employees
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Relying on rightsizing state employee health care benefits
to put them in line with the private sector, for $470 million in savings
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Reducing state subsidies to Illinois’ nearly 7,000 units of
local government, for $80 million in savings
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Failure to adequately address the unpaid bill backlog
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Counting on $240 million in revenue from the sale of the
James R. Thompson Center
With the exceptions of counting on revenue from the sale of the
Thompson Center and not doing enough to pay down the bill backlog, the Civic
Federation’s criticisms are wrong-headed. Furthermore, the Civic Federation’s
own proposed budget relies on a number of painful tax increases that Illinoisans
should not tolerate.
Ultimately, the governor’s proposed budget is balanced, as the Civic Federation
admits. In a state that has not had a balanced budget since 2001, even
“precariously balanced” is a step up. Fortunately, taxpayers don’t need to
settle. While Rauner’s budget includes some good ideas, a better path forward
for Illinois is to demand lawmakers adopt a voluntary spending cap.
The following is an overview of what the Civic Federation gets wrong about
Rauner’s budget, what it gets right, and why continuing to hike taxes on tapped
out Illinoisans isn’t a fair solution to the state’s fiscal problems.
 “Cost shift” is really about placing responsibility for costs with those who
determine them
The largest single savings proposal in the governor’s budget is what opponents
derisively refer to as a pension “cost shift.” In truth, this proposal is about
properly aligning incentives when it comes to local pensions and is based on a
simple principle: A bill should be paid by the one who incurs the cost.
Currently, although local school districts and universities set compensation for
employees, the state of Illinois pays the “normal cost” of pensions for the
Teachers’ Retirement System, or TRS, and State Universities Retirement System,
or SURS. Normal costs are the employer portion of the pension bill incurred by a
new year of pension benefit accruals, not including previous unfunded
liabilities.
The status quo is an example of a classic economics problem often referred to as
“concentrated benefits and dispersed costs.” Local elected officials can make
spending decisions on salaries and pension-boosting perks with little regard for
the total cost, which is passed on to the state. It’s a win-win for local
officials and public employees.
Who loses? Taxpayers. This higher pension bill translates to higher taxes and
crowding out spending on essential services.
The Illinois Policy Institute has proposed eliminating this distortionary
subsidy in the past. The governor’s budget proposes phasing out the subsidy over
four years. Savings for the first year would total $825 million, broken down as
follows:
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$262 million by transferring 25 percent of the TRS normal
costs
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$101 million by transferring 25 percent of the SURS normal
costs
-
$228 million by returning to the practice of the Chicago
Teachers’ Pension Fund, or CTPF, paying its full normal cost
-
$129 million by ending lifetime health insurance support
for retired teachers
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$105 million by transferring some university group health
insurance costs back to state universities
Fiscal year 2018 was the first year the state paid for the
normal cost of the CTPF, which has paid its own costs since 1995. While the
Civic Federation states that it is in favor of the “cost shift” idea in general,
it objects to Rauner’s proposal out of a particular concern for Chicago, at the
expense of the rest of the state.
 Realignment of pension costs is a commonsense proposal to control the growth in
pension benefits and reduce pressure on the state budget, which has repeatedly
led to tax hikes. Combined with policies to reduce property taxes, properly
aligning public retiree costs will protect taxpayers and help put Illinois back
on a path towards fiscal solvency.
Rightsizing AFSCME health insurance costs
The Civic Federation criticized the inclusion of this health care savings
proposal because they believe the savings are unlikely to pass through the
General Assembly. But taxpayers deserve advocates for good policy proposals, as
well as allies in the fight to push them through the General Assembly.
State workers receive platinum-level health insurance at bronze level prices.
Illinois taxpayers currently pay 77 percent of the cost of state employee health
insurance. The $18,031 per employee annual cost is $4,606 more than the average
per employee health insurance cost in the private sector, according to the
Governor’s Office of Management and Budget, or GOMB.
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Since the expiration of the last contract for the American
Federation of State, County and Municipal Employees, or AFSCME, the
governor has been proposing to increase state worker contributions
to their health insurance plans to 40 percent, up from just 23
percent.
While it is true that these efforts have so far been blocked by
union-driven litigation, the governor has asked that lawmakers
change a state law that requires the benefits to be collectively
bargained, according to the Chicago Tribune.
It may well be true that Democratic leaders in the General Assembly
would be unwilling to adopt this proposal, preferring to protect the
inflated benefits of AFSCME workers. This is not, however, a reason
to oppose the solution on policy grounds. Instead of trying to
predict what lawmakers will accept, the conversation should be about
what taxpayers deserve and how advocates can convince lawmakers to
do the right thing.
Eliminating subsidies for excessive numbers of local governments
The Civic Federation opposes this idea on the grounds that the state
should be a partner with local governments and help them bear
financial burdens. Unfortunately, the financial burden of state
subsidies for local governments ultimately falls on taxpayers’
shoulders.
Illinois has nearly 7,000 units of local government, which is over
4.5 times as many as California on a per capita basis. Illinois also
has some of the highest property taxes in the nation, according to a
recent report from ATTOM Data Solutions, and the excessive number of
local governments is a significant contributor.
Illinois state government enables and subsidizes this overabundance
of local government through income tax sharing subsidies known as
Local Government Distributive Fund, or LGDF, disbursements.
The governor’s budget for fiscal year 2019 proposed a more modest 10
percent “cut” in LGDF – meaning 10 percent less than local
governments would expect if spending was on autopilot – for $80
million in savings.
Unfortunately, a recent change has made public transparency around
LGDF even worse. As part of the fiscal year 2018 budget, the General
Assembly hid this subsidy from the budgeting process. Instead of
being counted as an expenditure, LGDF income tax sharing is now
automatically sent out.
That’s why the Civic Federation misleadingly refers to the
governor’s proposal as “additional revenue.”
In truth, ending or reducing LGDF subsidies is a taxpayer-friendly
solution if combined with policies to reduce property taxes and give
local governments more control of their spending –such as collective
bargaining reform, reducing unfunded mandates and increasing
opportunities for local government consolidation.
Civic Federation’s valid criticisms are overshadowed by tax hike
proposals
The Civic Federation is right that the governor should not count on
$240 million in revenue from the sale of the Thompson Center. The
governor included this idea in his fiscal year 2017 and 2018
proposed budgets, but the sale never happened due to legislative
resistance.
The Civic Federation is also correct in criticizing the proposed
budget for its lack of a long-term plan to pay down the backlog of
bills. GOMB predicts the bill backlog will stand at $7.7 billion at
the end of this fiscal year.
Unfortunately, the Civic Federation’s proposed solutions for fiscal
year 2019 are even worse. The group’s plan relies on nearly $3
billion in new tax hikes, including $2.5 billion more from taxing
retirement income and hundreds of millions from expanding the sales
tax to include services.
Generally speaking, good tax policy should have low rates and a
broad base, meaning few exemptions. But in Illinois, every tax hike
should be viewed suspiciously. Illinois already has one of the
highest taxpayer burdens in the nation when combining state and
local taxes. A 2016 survey from the Paul Simon Public Policy
Institute found that nearly half of Illinois residents polled wanted
to leave the state, and taxes were the No. 1 reason.
In an overtaxed state, tax hikes also hurt jobs growth and the
overall economy. The 2011 temporary income tax hikes cost the
Illinois economy $55.8 billion in real GDP from 2012 through 2016
and the 2017 permanent income tax hike is likely to be similarly
damaging.
If the Civic Federation wants to simplify the tax code or remove
exemptions, it should look to do so only in a way that is revenue
neutral or provides tax relief to Illinoisans.
Instead of trying to take more money from taxpayers, Illinois
lawmakers should voluntarily adopt a spending cap for the fiscal
year 2019 budget. To their credit, the Civic Federation did include
a version of a spending cap in their own proposal, though it is
limited in not applying to spending outside of executive agencies. A
meaningful spending cap should apply to all general funds spending.
A voluntary spending cap would give lawmakers roughly $36.9 billion
to spend this year, about $753 million less than expected revenues.
That surplus could be used to more than double the governor’s
proposed payment to the bill backlog. In the long term, a spending
cap combined with structural reforms to the cost drivers of the
Illinois budget – such as pensions and health care – would allow
lawmakers to pay down the bill backlog, set money aside in a rainy
day fund, and provide tax relief to Illinois residents
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