CHICAGO — Illinois can balance its books and solve its pension funding crisis with $8 billion of tax hikes, spending cuts and program savings, says a prominent business group that is billing its plan as a path to double-A bond ratings.
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“Illinois needs to repair its fiscal condition which is the biggest impediment to the strong economic and job growth our state needs,” said Jay Henderson, chairman of Civic Committee’s Tax Policy Task Force. “It is a solvable problem and we have laid out a five-year framework that does it.”
The time is ripe for a long-term solution with Democratic control of the General Assembly and now the governor’s office, the group said. Deep divisions over policy and budget goals between the General Assembly’s Democratic leaders and former Gov. Bruce Rauner, a Republican, drove a two year budget impasse that dragged the state’s rating down to one to two levels above junk.
The committee said its plan would restore structural balance by wiping out projected deficits of about $3 billion annually over the next five years, and stabilize a pension funding crisis underscored by a $133.7 billion unfunded liability tab and 40.1% funded ratio with payments consuming 20% of the general fund. The committee said its proposal also would wipe out the state’s $7 billion bill backlog and establish $5 billion in reserves.
The “Restore Illinois: a Foundation for Growth” plan would take five years and require $8 billion annually — $6 billion in new tax revenue and $2 billion from cuts – to achieve the fiscal turnaround.
“Pursuing these policies, in turn, will lay the groundwork for an upgrade in the state’s credit rating to AA. This is a goal of the Task Force not only because it will reduce the cost of borrowing for the state, but, more fundamentally, because the rating is a measure recognized throughout the world of the State’s fiscal health and stability,” the report says.
Illinois once enjoyed double-A level ratings but by 2010 they had fallen to the single-A category. Today, the state is barely in the investment-grade category, at BBB-minus from S&P Global Ratings, Aa3 from Moody's Investors Service, with Fitch Ratings a notch higher at BBB.
The committee's earmarks up to $3.5 billion annually to cover projected deficits over the next five years, with $1.5 billion going to pay down the bill backlog, $1 billion going into reserves, and $2 billion toward a supplemental annual contribution to the pension system.
After the five-year period, the state should consider rolling back the recommended tax increases, the report says.
The pension funding plan is more complex as it involves a restructuring of the current 50-year funding schedule adopted in 1995 that has a 90% funded target.
Baseline contributions would grow annually at a 2% clip instead of the current pace, trimming about $500 million in annual contributions, but the state would make a $2 billion supplemental contribution until the plan reached a 90% funded ratio in 2045. The remaining unfunded tab would be amortized over a 10-year period. The group contends the changes would shave about $8.6 billion off overall costs and achieve a 100% funded ratio, not 90%.
Potential revenue sources for the additional $6 billion include a 1% personal and corporate tax hike that could generate an estimated $4 billion annually, imposing a tax on retirement income that could raise $1.9 billion, and taxing consumer services not now taxed to raise $500 million.
The plan’s options for achieving $2 billion in savings include $1 billion in spending cuts, $500 million in savings from the pension funding overhaul that would lower the annual scheduled increase, and $500 million from changes to current employees’ healthcare benefits.
The plan also recommends the state implement a new retiree healthcare program that trims benefits for new employees to bring down future retiree healthcare costs. The state had a $42 billion unfunded other post-employment unfunded liability as of 2016 and pays benefits out on a pay-as-you-go basis.
The Illinois Supreme Court has ruled existing retiree healthcare benefits for current employees and retirees enjoy the same state constitutional protections against impairment as pensions.
The Pritzker administration responded to the plan with a congenial tone. “We appreciate the recommendations the Civic Committee is making as we begin this journey, and we will continue to listen to and work with all stakeholders as we move forward,” said Pritzker spokesman Jordan Abudayyeh.
An administration source also noted that Pritzker had already publicly ruled out some of the revenue ideas including a general income tax hike and taxing retirement income. Pritzker is pushing for a constitutional amendment to shift to a graduated income tax.
Pritzker has said he’d like to revise the pension funding schedule to bolster near term contributions but has not yet offered a plan.
The importance of dealing with the state’s deficit and pension woes was highlighted in a special commentary published by Moody’s Wednesday.
“In general, any efforts to boost current contributions would be credit-positive for the state, while efforts to defer or reduce contributions for fiscal relief would revive questions about pension plan sustainability,” Moody’s said. “New revenue likely to be required for Illinois to achieve fiscal balance.
“An inability to achieve budget balance without non-recurring measures or an increase in the already large ($7.2 billion) backlog of unpaid bills — could have negative credit effects,” Moody’s warned.
Moody’s also listed out-migration as a concern which has to be considered as the state weighs how to cure its fiscal ills. From 2013 through 2018, Illinois lost 544,541 residents through migration to other states, Moody’s said.
