Arguably the two biggest issues facing the State of Illinois are its unfunded pensions and high property taxes. Past misdeeds and underfunding has led to a massive unfunded pension liability. Annual required pension payments are increasing quickly. Just a few years ago our annual payment was less than $6B. This year it is almost $9B and it is scheduled to reach $20B by 2045. Every annual increase requires either a cut elsewhere in the budget, or a tax increase.
Illinoisans pay some of the highest property taxes in the nation. This has been a driver of job and population loss. It is a regressive tax that disproportionally affects the poor, unemployed, and elderly. It also hurts small business growth as they are required to pay the tax whether they are profitable or not. Manufacturers are hit extra hard as they have a large real estate footprint. That footprint comes with a large property tax bill.
This piece will outline a long-term solution to address both issues.
The Center for Tax and Budget Accountability (CTBA) recently offered a solution on pensions. Their idea was to use the power of compound interest to help drive down massive pension costs in the future. Relatively small skips in pension payments, sometimes called “pension holidays”, in the past led to large-long term debt because of compound interest. Their idea was to reverse that mistake by increasing upfront payments in order to avoid more dramatic increases in the future.
The CTBA’s plan would level pension payments out over the next 25 years until we reach the required funded status. However, this plan would require the state to contribute additional funds over the next 8 years. The initial additional investment by the state would be $2.4 billion which would then slide downward to $320 million in the eighth year. Over the course of eight years additional, and significant funds, would be invested into the pension plans. In total roughly $11 billion extra would be invested quickly. The net effect of this would be that our annual pension payment would never rise above $12 billion. In fact, around the tenth year, our pension payments would actually start to decrease. One important note is that if our system was fully funding pensions in the past, our ongoing costs would only be $2 billion per year.
The CTBA recommends borrowing the additional $11 billion investment. That is where the plan can be tweaked. Borrowing another $11 billion adds additional pressure to the budget. It also does not allow us to phase in property tax relief which is part two of the plan. We need to, and can, find the additional $2.4 billion per year elsewhere.
As the additional pension payments decrease from the initial $2.4 billion, the remainder should be used to lower property taxes on a per pupil basis. So year one, $2.4 billion is going to shore up the pensions. By year nine, all $2.4 billion is going to property tax relief. For every additional dollar in state funding a school district receives, its levy will be required to drop by exactly $1. $2.4 billion is roughly $1200 per pupil. That amount would lower the property taxes where I live by 20 percent. The exact amount of relief per district would vary based on local per pupil spending but it would be significant throughout the state.
Actually having a long term solution to both problems would dramatically improve our credit rating, business climate, and borrowing costs. This would lead to the best way to improve our debt situation – growth.
So where would we get the $2.4 billion? There are several options. First, we need to be much better stewards of the taxpayer’s dollars. Things like workers’ comp reform, expanding the pension buyout plans, reforming Medicaid are some immediate areas that can be addressed. We also need to prioritize our spending. Remember the $3 billion we committed to “medium speed rail”? Wish we had that back.
$2.4 billion separates Illinois from solving the pension crisis and significantly addressing high property taxes. All of us in the legislative and executive branch should be working to find that $2.4 billion. If we don’t, we will be looking for much, much more in the near future.