Two of the largest fiscal issues facing Illinois for the past few decades have been our unfunded pension liability and our sky-high property taxes. While there is still work to be done regarding our unfunded pension liabilities, we’re turning the corner. My plan will outline a process to use the increasing savings from our gradual reduction in pension payments to lower property taxes.
This is my 23 year plan to reduce property taxes by 50%—the foundation for property tax relief.
Why Have We Turned the Corner on Pensions?
I’ve identified three reasons why we’ve turned the corner on pensions. The first reason: Tier 2. There is no doubt the switch to Tier 2 roughly a decade ago is producing savings. We are near the point where 50% of employees in one of the five state systems are under the Tier 2 program.
The second reason is our payment schedule. Usually referred to as the “ramp,” which requires our pensions systems to be 90% funded by 2045. We are reaching the point of the schedule where we are no longer in a negative amortization situation where we continue to make larger payments while the unfunded liabilities continue to grow.
The third reason is inflation. This is the least recognized item that has helped reduce our pension liability in real dollars. Inflation is generally bad, but if you’re a debtor, it can actually help your financial situation.
Here’s how it works: $1 of debt in 2022 is certainly not as bad as $1 in debt in 1970. The same holds true with our unfunded pension liabilities. If our liabilities stay flat in terms of dollar amount, 8% inflation for 2 years essentially wipes off 16% of our debt. This shows up in our budget by our pension payment going towards the unfunded liability becoming a smaller percentage of the overall budget.
Another aspect of inflation helping our pension situation is our compounding automatic annual increase (AAI) for Tier 1 pensioners of 3%. The AAI may have seemed like a sound idea when it passed because we were just off years of high inflation (in fact, in 1990, a treasury bond was yielding nearly 9%!). In that kind of high inflationary environment, a structured AAI of 3% was affordable – but when inflation was lower than 3% that structure caused liabilities to increase at a greater rate than economic growth, making it more difficult to keep up with payments. Consequentially, those years of low inflation made our ramp more difficult since the 3% AAI outpaced inflation.
Why Use Future Pension Payment Savings on Property Tax Relief
High property taxes are one of the most regressive types of taxes possible. Homeowners pay them—no matter how much they make or whether or not they even have a job. Companies pay them whether or not they turn a profit. Most saliently, less affluent areas of the state pay a higher property tax rate than richer areas—to secure the tax dollars local governments need, they must tax a lower-value area of the state a higher rate to achieve the same dollar total, which disincentives investments in those communities.
This system has created areas of the state where economic growth is nearly impossible. I grew up in the south suburbs in Lansing. Commercial property taxes in Lansing can be as high as 13% of market value. The south suburbs have great infrastructure; they are close to an awesome workforce, river, rail, and road. But the property tax rate makes it economically unviable for most companies to invest there despite the terrific infrastructure.
Instead, corporate giants have been tearing up farm fields in Will County and further west. Why? Because it doesn’t make sense to build a $200 million warehouse in a location that would have a $26 million property tax bill. There’s a massive need for new infrastructure to support these properties in these areas. This infrastructure wouldn’t have been needed if these properties were located in existing areas that already provide it.
Dramatically lowering property taxes will have a compound effect everywhere, but it will best impact the areas that are hurting the most, like the south suburbs. It will spur economic growth which, in turn, will organically work to lower property taxes, benefitting everyone. On a broader scale, this could lead to an increase in jobs in these locations, which could decrease crime and reinvigorate these communities. This is truly a foundation of success for these great Illinois towns that have been burdened under high property taxes.
How to Implement the Relief
If you reference Appendix R at this link, in Fiscal Year 2017, our pension payment peaked at 29.4% of our budget. It has been decreasing since, getting as low as 20% in FY21. There is a bump in the current budget (FY23) resulting from an additional pension payment that was made. Next year, it is scheduled to drop to 22.9%. It then continues to drop until 2045, where it will be 18.5% of the budget. Then the ramp ends and we reach the point where we only pay normal costs, which is about 5% of the budget.
My plan would designate that 25% of the general revenue fund budget toward the traditional pension payment and a new property tax relief component. If the pension payment in any given fiscal year is less than 25% (as it is projected to be) then the dollar difference would go directly to property tax relief. The result would be a flat percentage payment, which lawmakers have already grown accustomed to, that will target direct relief to property taxpayers. In short, as the pension payment drops, so would the overall property tax burden.
The savings would be distributed to local school districts on a per-pupil basis, which would then be used to reset the levy to account for the relief on a dollar for dollar basis. Plainly, this means that $1 in additional funding to a school district would, in turn, lower the base levy by $1. The additional money would add to what is referred to as “local capacity” (an ability to self-fund schools through property tax revenue under the current Evidence Based Funding (EBF) formula). The EBF formula would then be implemented on top of the new, lowered base levy in order to distribute the normal state funding for schools. In the end, areas with lower local capacity and high tax rates would win the most.
This plan would designate nearly $1 billion in property tax relief in the next fiscal year. Using the formula in my school district would roughly equate to a 4% reduction in Property Tax Year One. By 2046, we will be able to designate 20% of the budget to property tax relief. If we could do that now, that would equate to approximately $4,000 per student. Imagine how much that would lower property taxes! Obviously this would vary per district, but lower income areas should see the most relief.
Impact of the Relief
Below, you will see data on my proposed scenario for alleviating property tax relief with pension reform. Graph 1 represents the difference that will go towards property tax relief over time from FY23 to FY45. This difference is determined by subtracting the projected pension payment from the payment held at a flat level of 25% over time, which is then directed towards property tax relief.
Conclusion: Setting the Foundation
Property taxes are a regressive tax that hurt Illinoisans who need relief the most. A long-term plan to reduce them will spur economic growth everywhere. Instead of letting future pension payment savings be slowly whisked away into future budgets, let’s do something that will dramatically improve our future economic fortunes. Lawmakers talk a big game about supporting property tax relief, but nothing ever comes of it. Instead of letting future pension payment savings be spent on legislator pet projects, let’s target those savings towards property tax relief that will result in additional investment in communities and relief in everyone’s pocket. Let’s solve the property tax issue with a strong foundation of pension reform.