4 months, 1 week ago Ray Long, Chicago Tribune
A good bet the tax hike will stick around whether or not lawmakers approved last week's major overhaul
From Ray Long, Chicago Tribune:
The harshest Republican critics of a new law to wipe out the state's $100 billion government worker pension debt argued that the plan should have saved more money or Illinois' temporary income-tax increase that's set to expire will never go away.
A look at the state's finances, however, shows it's a good bet the tax hike will stick around whether or not lawmakers approved last week's major overhaul of the retirement systems. If lawmakers allow the tax increase to expire as scheduled at the end of 2014, the state will lose about $5 billion a year. That's one-seventh of the state's $35 billion operating budget.
"We've got a very, very, very big hole just around the corner under current tax law," said Sen. Daniel Biss, an Evanston Democrat with a bachelor's in math from Harvard and a doctorate in math from MIT. "I can't think of a pension reform package in the world to make up that lost revenue. I don't think the arithmetic is there."
The pension law Democratic Gov. Pat Quinn signed Thursday does provide the state some budget relief. If the measure didn't pass, the state was expected to be on the hook in the new budget for about $6.94 billion in pension costs, an amount that was supposed to go up steadily for years.
Changes in the new law mean the state could free up as much as $1.3 billion a year from employee pension spending, according to legislative calculations just before the final bill was called for a vote.
It would be risky for lawmakers to count on that relief until the pension law works its way through the courts in what is expected to be a monumental legal fight by labor leaders challenging the law's constitutionality. But next year is an election year, and as lawmakers noted during the pension debate, the General Assembly has not developed a reputation for fiscal restraint over the years.
Expert analysts are still unpacking the financial intricacies of the newly minted 327-page pension law that many rank-and-file lawmakers had less than a day to read before they narrowly voted Tuesday to send it to Quinn.
The new law raises the retirement age for young workers, scales back cost-of-living increases for retirees and skips up to five of those annual adjustments, depending on a person's age. Longtime employees with small pensions get to keep in place 3 percent compounded annual increases until they hit a level based on years worked. An optional 401(k)-style plan would be available for some of those who would like a bigger hand in managing their money. And workers would see a 1-percentage-point decrease in the amount of money taken from paychecks to support the pension system.
During debate on the bill, Rep. Tom Morrison, R-Palatine, made it clear he had seen enough financial and political math to make his own judgment.
"It was a crisis three years ago," Morrison said. "It will remain so today. That will equate to a tax increase on the general public."
It's been nearly three years since Democratic majorities in the House and Senate approved the income tax hike during a lame-duck session. The move raised the personal income tax from 3 percent to 5 percent, a 67 percent increase in the rate.
At the end of next year, what was billed as a temporary income tax hike will by law drop to 3.75 percent unless lawmakers and the governor decide to continue it.
Oddly, the income tax would be cut in the middle of the state's budget year. That gives planners a bit of a cushion, though the expiration of the tax hike still is estimated to take $2.2 billion out of state coffers for the final six months of the budget year that starts July 1.
Quinn will have to account for that major loss in revenue in the new spending plan he's scheduled to unveil in February, a month before Republicans pick a nominee for governor in the primary election. The usually loquacious governor, who in 2010 ran for election openly in favor of raising the income tax, has chosen to dodge the question of whether he wants to keep the higher tax rate in place as he runs for re-election next year.
"We'll take that up in the coming year," Quinn said at his Capitol office last week. "There's a chance to address all kinds of budget issues when budget time comes up in the next fiscal year."
The should-it-stay-or-should-it-go tax hike question is likely to be a big issue in the race for governor. The fate of the tax hike will have a major impact on whoever is sitting in the governor's office come 2015. That's supposed to be the first full year of a lowered income tax and legislative budget forecasters predict a $4.8 billion loss in revenue. It's a tough number for even the biggest budget cutter to hit.
The politicians in Springfield have a few paths: Pass a half-year budget. Stick money in lump sums rather than line items so dollars are harder to track. Tell voters the candidate for governor who wins the November election should get to shape his budget. Delay payment of more bills and so forth.
Republican Rep. Michael Fortner of West Chicago said lawmakers could have tried to pass a law that cut into pension spending to generate enough savings to allow the tax hike to go away, but then the pension systems would not have been fixed. For example, the law might have set up a process where only 70 percent of the pension debt was erased instead of 100 percent, but then the state's mission would not have been complete, he said. It also may have failed in court, he added.
Fortner, who teaches physics at Northern Illinois University, is widely credited at the Capitol with coming up with a way to accelerate payments on the pension debt and save billions. But Fortner voted against the pension legislation, citing reasons that included concerns that the funding guarantee was too weak.
There also is the question of what things might look like if deeper budget cuts are made.
Rep. Elaine Nekritz, a Northbrook Democrat who was the pension point person for House Speaker Michael Madigan, said none of the retirement overhaul bills considered would have cut into pensions so deeply that the state would have received a dollar-for-dollar savings equal to the $4.8 billion lost income in tax revenue. Such a move would "decimate" education spending and hurt the pensions themselves, she said.
"That would require some really, really deep cuts to retirees," Nekritz said, "And active employees would expect almost no pension when they retired if we were to do that."