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Op-Ed: Illinois' budget needs structural
reforms to see long-run balance
[The Center Square] Adam Schuster |
Illinois Policy Institute
At his budget address Feb.
2, Gov. J.B. Pritzker claimed his budget proposal would achieve an
unprecedented $1.7 billion surplus this year. But, documents released by
his budget office show Illinois would end the year with a $1.5 billion
deficit. Turns out even $14 billion in federal aid for the state was not
enough to stabilize the state’s finances … not to mention the $190
billion received across the public and private sectors that ensured
income and sales tax revenues stayed high. |
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 This is it. After this budget year, the extra support from D.C.
goes away. If Illinois fails to use the federal rescue as a chance to fix
decades of decay to the financial scaffolding holding up its workers and
retirees and vulnerable residents, it will end up shakier and risking collapse
even more than before the pandemic. The state projects deficits
each year starting in 2023, with no extra revenue to fill them when federal aid
expires in 2024.
But with three fixes, Illinois could balance its budget this year, eliminate the
long-term structural deficit and pay off its $3 billion bill backlog – without
leaning on federal aid or tax hikes. Common-sense pension reform, cutting
wasteful administrative spending so education dollars go to classrooms and
right-sizing taxpayer costs for state worker health insurance can reduce
taxpayer costs in the state budget by nearly $3.6 billion the first year.
The biggest repair would come from pension reform. Why? Because pension debt is
directly linked to Illinois’ high taxes, reductions in government services, low
growth in home values and lagging economic growth. The average Illinoisan loses
$1,417 in income each year thanks to the pension crisis, research shows. The
debt gives Illinois the nation’s worst pension crisis: nearly $236 billion, or
27.3% of gross domestic product in fiscal year 2020, according to Moody’s
Investors Service.
Repeated tax hikes during the past decade have failed to fix Illinois’ financial
instability. What they have done is damage its economy, proving more tax
increases is the wrong answer. Illinois already spends more on pensions as a
share of its revenues than any other state: more than double the national
average. But despite that massive spending, a debt burden as large as Moody’s
and other independent experts calculate would take doubling Illinois’ current
pension spending – an amount that would eat over half of the state budget – to
pay down the debt. That sacrifice would mean $10 billion in service cuts or a
50% income tax increase: $1,800 more each year taken from the average family.
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Illinois has already given up a lot in its failed
attempt to keep up with pension debt. Those sacrifices have cost
higher education, public safety, public health programs, and vital
services for the poor and vulnerable. Since fiscal year 2000, a 584%
increase in inflation-adjusted pension spending was accompanied by a
20% cut to many core services.
Only an amendment to the pension clause in the Illinois Constitution
can fix the crisis. The Illinois Policy Institute supports a
hold-harmless pension reform amendment, which would still treat
earned benefits as an iron-clad contract but would allow for changes
to future benefit growth for current workers and retirees. It would
make these benefits sustainable and affordable, to the benefit of
both taxpayers and workers who want to know their pensions will be
there when they need them.
But before that constitutional change requiring a
statewide vote, there is a simple fix: the Tier 3 hybrid plan, which
would be an option for new workers. The legislation was already
signed into law in 2018, but a technical error left it without a
start date. It can be easily fixed.
The Tier 3 plan could save the state budget as much as $577 million
the first year. New workers would have it as an alternative to the
unfair Tier 2 pension system that forces newer workers to pay more
to get less in retirement than their older peers. Tier 3 is part
defined-benefit and part defined-contribution – a mash-up of
traditional pension and 401(k) style systems. Putting a start date
on the law is an easy fix to an embarrassing mistake that could save
big money. The alternative is bleak. Under the
status quo, pension debt will continue to balloon and state spending
will continue rising out of control. Illinois’ unpaid bills will
rise back to a dangerous $6.5 billion within five years, roughly
where it hovered before federal aid temporarily paid it down.
Illinois has a big decision. Leaders can learn from past mistakes
and use this short respite to fix the structure. Or they can treat
this like a coffee break, resume tacking on tax hikes and let their
hammering alert more people to run before the whole thing falls on
them.
Adam Schuster is senior director of budget and tax research at the
Illinois Policy Institute. |
