Pension reforms, spending cuts must come before tax hike

Friday, August 20, 2010

Illinois is broke. In the short run, it is running out of cash - and borrowing to cover its own operations as well as to fund health care, schools, local governments and social services. Or it simply fails to pay its bills - borrowing, in effect, from its suppliers.

In the longer run, Illinois operates with a radically imbalanced annual operating budget that is perhaps $15 billion in the hole when one takes into account mushrooming pension and state retiree health costs.

Why?

Illinois supports a wage and benefit structure for state employees that does not reflect the pressures of the marketplace or the economic realities of modern America. State workers were given generous multiyear raises in fall 2008 by then-Gov. Rod Blagojevich, at a time when such raises were a rarity in the private sector. State workers with enough years of service can retire at 55 with full pensions. The pension increases 3 percent per year. Then, at age 67, they get Social Security. The result is that they may receive more in retirement than they earned the last year that they worked.

State retirees also get generous health care insurance - and the state pays the entire premium. Those who retire at 55 or thereabouts can then find another job - possibly double-dipping in another state or municipal position, running up additional pension rights. In Chicago, workers can retire at 50 and then double-dip in another position.

The tolerance of Illinois voters for bearing these costs appears to be wearing thin.

First, it has become clearer than ever that Illinois cannot afford the costs of both the rich employee retirement benefits and the rising costs of education, health care and safety-net programs. Many voters care more about covering the latter than the former.

Second, voters have begun to realize that Gov. Pat Quinn's proposed 1 percentage point increase in the income tax - from 3 percent to 4 percent - would do no more than scratch the surface of the state's budget deficit problem. In the absence of budget reform and serious cost cutting, the tax increase needed to correct the state's real budget imbalance would be in the range of 5 percentage points - increasing the personal income tax rate from 3 percent to roughly 8 percent. (A 1-point increase in the tax rate is estimated to yield about $3 billion in additional revenue per year. The real annual deficit is now in the range of $15 billion.)

Without budget reform - particularly pension and retiree health reform - the pressures for very large tax increases will continue to grow; and as they do, public opposition may well morph into outrage. This is the nightmare that haunts many of our elected officials and candidates for office.

Third, organized labor is itself far from monolithic. Older union members may have a very different interest than members in their 20s or 30s, who are required to contribute money to pension funds that are likely to run out of money in 10 years or so.

What happens if and when one of the pension funds runs out of money? Nobody knows for sure. But in Illinois - and in Chicago - there are strong legal arguments that neither the state nor the city would be liable as guarantors of the pension fund obligations. The state Constitution does not make the state the guarantor. As pension funding levels continue to drain away, younger employees may well ask: Shouldn't there be some equitable adjustments to make sure that their contributions are not being used entirely to pay benefits for those in or nearing retirement?

Bankruptcy of a pension fund would be a disaster for retirees and their families. Many would blame the state - rightly - for past failures to fund the pensions adequately. But some might also blame union leadership for letting it happen, for preferring current costly wage levels at the expense of adequate pension funding, or for opposing reasonable reforms that would make pension funding less unpopular.

The way out of this mess is clear, but it is far from painless. It is to reform the pensions and retiree health plans; cut Medicaid and other costs; and balance the state's budget. Only after the reforms and cuts are in place should raising taxes even be considered. Otherwise, the reforms and cuts would never happen. Parties and candidates will disagree about the right combination of steps to be taken; but overriding these disagreements are two fundamental realities: The budget must be balanced, and the borrowing has to stop.

The longer these painful steps are postponed, the more painful they will become, as more and more of today's costs are shoved off onto the future.

Voters should think about these things as they consider who to support in the fall elections.

R. EDEN MARTIN IS PRESIDENT OF THE CIVIC COMMITTEE OF THE COMMERCIAL CLUB OF CHICAGO AND A MEMBER OF THE ILLINOIS IS BROKE CAMPAIGN, WWW.ILLINOISISBROKE.COM.