Civic Federation releases fiscal blueprint
Friday, Feb 10, 2017 - Posted by Rich Miller
* AP…
A new report says Illinois’ financial situation is so bad that the state would have to slash spending by more than 26 percent to balance next year’s budget through cuts alone.
The nonprofit Civic Federation released its proposed five-year plan for stabilizing Illinois’ finances on Friday. […]
Civic Federation President Laurence Msall says Rauner and legislators “need to take action immediately.”
The group recommends Illinois limit spending growth and increase the individual income tax rate from 3.75 to 5.25 percent.
* From the plan’s summary…
Limit State Spending: Illinois should limit spending growth to 1.7% through at least FY2022, using the Governor’s estimated maintenance FY2017 spending level as a base. The State should also stop paying hundreds of millions of dollars in unnecessary interest penalties on its overdue bills. Ending the budget impasse is the only path to reducing the state’s highest-in-the-nation interest costs, including an estimated $700 million in penalties if bills on hand are paid at the end of FY2017.
Increase Income Taxes: The State should retroactively increase the income tax rate to 5.25% for individuals and 7.0% for corporations as of January 1, 2017. If the Civic Federation’s proposals are implemented, the State should be in a position to lower the individual tax rate to 5% on January 1, 2022. The burden of the increase on low income residents should be alleviated by expanding the earned income tax credit by 50%.
Eliminate Tax Exemption for Federally Taxable Retirement Income: Out of the 41 states that impose an income tax, Illinois is one of only three that exempt all retirement income. The State can no longer afford to provide this generous benefit, which is out of line with most other states.
Expand Sales Tax Base and Lower the Rate: The State should enact a new service tax including a broad-based definition of consumer services and a firm exemption for business-to-business transactions and medical services. In conjunction, the State should lower the general sales tax rate for goods and services from 6.25% to 5.5%. This would reduce the effective rate in Chicago to 9.5%, down from 10.25%, which is the highest of any major metropolitan area in the nation.
Limit Business Tax Expenditures: Illinois should cap the retailer’s discount, eliminate the E-10 ethanol incentive, decouple from the federal domestic production activities deduction and eliminate the continental shelf exemption, because these expenditures do not provide sufficient public value to justify their cost.
Merge the Chicago Teachers’ Pension Fund with the Teachers’ Retirement System: There is no good public policy reason for Illinois to maintain two separate funds for public school teachers’ pensions. The Chicago Teachers’ Pension Fund and Teachers’ Retirement System should consolidate, providing more equitable pension funding for all teachers and helping to stabilize Chicago Public Schools’ finances.
Consolidate and Streamline Government Units: The multiplicity of Illinois’ highest-in-the-nation 6,963 units of local government is often cited as a reason for high property tax rates in Illinois.
Borrow to Clear the Bill Backlog: In conjunction with a balanced budget and credible plan to maintain fiscal sustainability, borrowing to eliminate the backlog would save on interest penalties and restore confidence in the State’s finances.
Make Supplemental Pension Payments: Beginning after backlog bond debt service ends, the State should make supplemental payments to bring all five State retirement systems to 100% funded.
Establish a Rainy Day Fund: The State of Illinois should work toward building a rainy day fund equal to 10.0% of State-source General Funds revenues to cushion the budget from the next economic downturn.
* More suggestions…
A constitutional amendment limiting the pension protection clause to accrued benefits;
A constitutional amendment allowing a graduated individual income tax;
A reduction in the interest Illinois pays on overdue bills under the Prompt Payment Act;
A return of the lapse period to two months from six; and
A phase-out of Section 25 liabilities and other practices that allow prior year’s costs to be paid from current year’s appropriations.
The full report is here.
Keep in mind that this is the Civic Federation, not the Civic Committee of the Commercial Club. Two very different entities, but they are often confused with each other.
Thoughts?
- Anonymous - Friday, Feb 10, 17 @ 9:56 am:
The tax on retirement income will cause mass exodus from the state, by those who can afford to leave, and they will not come back!
- Anonymous - Friday, Feb 10, 17 @ 9:56 am:
Hasn’t Supreme Court already addressed taxing retirees? Or are they speaking of new retirees?
- qualified someone nobody sent - Friday, Feb 10, 17 @ 9:56 am:
Mr. Msall always provides sane, logical policy methods to improve our State’s failed economic environment. Acknowledging the fact we’ve been an underfunded government for the last 2 decades, his tax proposals are similar to what he’s been saying for years. His wish list of Constitutional amendments seem impossible though.
- Linus - Friday, Feb 10, 17 @ 9:58 am:
While I don’t agree with 100% of their ideas, I have to say: This is what “conservative” really means, in the best and most honest sense of the term. The Civic Fed has done great work in framing some commonsense budget solutions. It’s a shame their ideas are not taken more seriously.
- Been There - Friday, Feb 10, 17 @ 10:01 am:
Wow. Lawrence actually came up with a pretty good plan. I’m more of a Ralph fan. Anyway, this part needs to be tweaked.
===Eliminate Tax Exemption for Federally Taxable Retirement Income: Out of the 41 states that impose an income tax, Illinois is one of only three that exempt all retirement income.===
The exemption needs to be kept but limited to maybe $100,0000. This would keep most people from getting whacked and since many of those paying the extra state tax probably still itemize they would get a fed deduction.
- Joe M - Friday, Feb 10, 17 @ 10:04 am:
Although I am not thrilled at many of its proposals, this plan would solve the state’s ongoing financial problems better than the “grand compromise” or IPI’s budget proposals.
- don the legend - Friday, Feb 10, 17 @ 10:04 am:
The state’s current fiscal condition is not theoretical or academic but is painfully real. It would seem that all these steps are reasonable alone or in combination.
- Sue - Friday, Feb 10, 17 @ 10:04 am:
Lawrence- is your listing of state exemptions on retirement income accurate? The States that have no income tax exclude all income? If you are going to muck around with rates and types- is it time to go progressive? Retirees are mobile and can flee this sorry excuse for a State
- lake county democrat - Friday, Feb 10, 17 @ 10:06 am:
I know I’m a broken record on this, but because our income tax is flat, raising it hurts the working class disproportionately (because at their income they’re spending for more vital things than an upper income person is). I’m ok with bringing retirement income into the tax base though because, well, we have to, and expanding taxes to services because I *suspect* services might tip a bit more on the progressive side (and because, well, we have to). Yes, an income tax hike is unavoidable, but it should be minimized - 5.25% is too high.
- Mittuns - Friday, Feb 10, 17 @ 10:07 am:
>The tax on retirement income will cause mass exodus from the state, by those who can afford to leave, and they will not come back!
I’m sure grandmas and grandpas from all over the state are chomping at the bit to move away from their families for save a couple Gs in taxes.
Consider this a fair deal for enjoying the decades of artificially low taxes.
- BBG Watch - Friday, Feb 10, 17 @ 10:08 am:
“The tax on retirement income will cause mass exodus from the state, by those who can afford to leave, and they will not come back!”
I’ll be out of Illinois a lot sooner than expected! Husband is already retired - just waiting for me (another 6 years). No way - I’m out of here!
- Henry Francis - Friday, Feb 10, 17 @ 10:11 am:
I am glad someone is speaking the truth. You are going to get less, and pay more for it. And the longer you go without a deal, the price tag will continue to go up.
- Sue - Friday, Feb 10, 17 @ 10:11 am:
Mittens- people are not constructed the way your comment suggests. The whole country today is what have you done for me lately i.e. Why people buy foreign goods even at the expense of American jobs
- Chicago Cynic - Friday, Feb 10, 17 @ 10:13 am:
It’s just math. Civic Federation is the least ideological (sorry CTBA and IPI) and most thorough organization. They are as non-partisan as you can get and just focus on solutions. I hope this report guides our lawmakers to more rational solutions.
As far as retirement income, I agree on exempting retirement income up to a reasonable # - say 75,000. But why should someone making 200,000 or more have their retirement income exempted from income taxes? It makes no sense.
- So tired of political hacks - Friday, Feb 10, 17 @ 10:13 am:
@Anonymous
The move out of the state card already overplayed. If you could afford to leave this mess and are still here you prob would stick it out over a 3-4-5 % tax. Plus there are already 41 states that tax retirement. The supr court ruling doesn’t affect taxes.
- wadeiea@yahoo.com - Friday, Feb 10, 17 @ 10:18 am:
Increase revenue with millionaire tax, legalization of marijuana and a tax on businesses that have a huge CEO to average worker salary ratio.
- Joe M - Friday, Feb 10, 17 @ 10:21 am:
I applaud them for at least recommending graduated income tax rates - and pointing out what other Midwest state’s income tax rates are — rather than sticking their head in the sand on that topic like so many in Springfield are.
- Anonymous - Friday, Feb 10, 17 @ 10:24 am:
“Why people buy foreign goods even at the expense of American jobs”
In many instances foreign goods are better than american goods. I’m not going to blindly buy due to “patriotism”
- Arock - Friday, Feb 10, 17 @ 10:25 am:
“Consider this a fair deal for enjoying the decades of artificially low taxes.” -When you consider all the taxes you pay in Illinois the total tax payments are high. With the exodus from the State of our children and grandchildren it will give us more than enough reason to move with all the new taxes on services and higher income tax. These new taxes do not even include all the municipal taxes that have been added in the last decade that have increased our tax load.
- Anonymous - Friday, Feb 10, 17 @ 10:25 am:
Glad there are some adults in the room. In 2015, the governor signed the K-12 budget while vetoing dozens of other budget bills because the sum total of spending exceeded revenue, even though he could have signed some of them under existing revenue. Now he opposes an employee pay bill because it is too short term and instead favors one that would give unlimited and indefinite authority to spend whatever he wants, completely ignoring revenue. He’s all over the place. Someone’s gotta be reasonable and consistent. Maybe it’s the Civic Federation.
- Anonymous - Friday, Feb 10, 17 @ 10:26 am:
Millionaire tax is incredibly stupid, but a simple progressive income tax, of say 3.00%, 4.50 and 5.5%, would be fine. And while amending the state constitution eliminate all traces of public employee pension protection.
- oldman - Friday, Feb 10, 17 @ 10:29 am:
I don’t agree with some of his plan, but it certainly covers all aspects of the problem and should be considered by both sides. Unfortunately, everyone is going to have to sacrifice in some way solve this problem. Just make it equitable.
- Skeptical - Friday, Feb 10, 17 @ 10:30 am:
Getting my house ready for sale. One child has already moved out of state and the other will attend grad school out of state. Not sure what the ISC would have to say about an amendment that limited pension protection to accrued benefits.
- Anonymous - Friday, Feb 10, 17 @ 10:30 am:
Totally agree on the legalization of pot. We need to be the first state in the midwest to do so we capture the market sooner. Too bad state government is filled with nitwits.
- Anonymous - Friday, Feb 10, 17 @ 10:33 am:
**Hasn’t Supreme Court already addressed taxing retirees? Or are they speaking of new retirees?**
No, IL could tax retirement income if it wanted - there is no constitutional issue. There is just a political issue.
The IL Sup. Court has dealt with pensions and retiree healthcare. Not taxation.
- Arsenal - Friday, Feb 10, 17 @ 10:34 am:
I wonder what the politics of a Constitutional Amendment to limit pensions would be. Obviously, the first obstacle to it would be the Legislature…
- wordslinger - Friday, Feb 10, 17 @ 10:35 am:
The medicine gets worse every day. And as S&P reported the other day (you saw it here and only here), the wild deficit spending of the last two years is doing long-term economic damage.
The backlog in bills will have grown from $4.5 billion in Jan. 15 to $15 billion by June 30. There’s really no other choice to finance it to clear the decks and lower the juice.
But keep in mind, that long-term borrowing will be to cover deficit spending for daily operations. That aint fiscally conservative, by any abuse of the phrase.
- wondering - Friday, Feb 10, 17 @ 10:39 am:
Only 15 states fully tax retirement. 5.25% on $100,000 computes to $875.00 per month for a 6 month and a day residential rent subsidy in say, Florida or Nevada. Sounds like a plan, establish residence where it is warm and have Illinois subsidize your snow bird getaway. The bonus is for 6 months a year you won’t hear the names Rauner and Madigan,
- City Zen - Friday, Feb 10, 17 @ 10:40 am:
==The tax on retirement income will cause mass exodus from the state, by those who can afford to leave, and they will not come back!==
It’s not like the state will lose out on any state income tax.
==The exemption needs to be kept but limited to maybe $100,0000.==
==As far as retirement income, I agree on exempting retirement income up to a reasonable # - say 75,000.==
So a worker making $45,000 pays full state income tax and a retiree with a $75K or $100K pension pays nothing. Yeah, that’s fair.
I don’t understand the love affair with such a high exemption for retirement income. How about we just exempt Social Security income an any other retirement contributions that were already taxed and be done with it.
- Free Set of Steak Knives - Friday, Feb 10, 17 @ 10:41 am:
=== The State should also stop paying hundreds of millions of dollars in unnecessary interest penalties on its overdue bills. ===
Reform the Prompt Payment Act. The 1 percent interest rate was meant to discourage state government from welching on its bills.
It is not working.
Instead, interest penalties have created a perverse incentive to not pay our bills on time. Lenders are profiting from floating loans to small vendors and nonprofits. And large companies are making a windfall by loaning money to the state of Illinois at 12 percent interest per year. Taxpayers ultimately foot the bill for both.
Bring payment under the Prompt Payment Act into line with market rates. And at the same time expand it to include grantees, units of local government, employees, etc. so that we are not discriminating against one group of creditors versus the other.
- From the 'Dale to HP - Friday, Feb 10, 17 @ 10:44 am:
We now live in a state were the Civic Federation is to the left of CTBA.
- bothanspy - Friday, Feb 10, 17 @ 10:50 am:
So how does retroactively increasing the income tax rate work? Doesn’t that violate some implied contract? I can imagine that some entity would argue that they have budgeted cash flow based on one rate.
- Been There - Friday, Feb 10, 17 @ 10:52 am:
===I don’t understand the love affair with such a high exemption for retirement income. How about we just exempt Social Security income an any other retirement contributions that were already taxed and be done with it. ===
Actually City Zen I agree with you 100% from a personal standpoint but I also understand the political nature of this issue. Whether the cutoff point is $100k like I threw out there or $1 there will be a political uproar from a huge voting bloc.
- Arthur Andersen - Friday, Feb 10, 17 @ 10:55 am:
In looking at the pension piece alone, some of the same problems we discussed earlier this week with the IPI plan are also present here.
The proposal provides a 3-year cost shift of the employer normal cost for TRS from the State to TRS employers. CTPF normal cost would be covered by the CPS. Our earlier discussions noted the difficulties of imposing a cost shift on schools that may already be tax capped/PTELLed and that may get a property tax freeze. A partial, but insufficient funding source is to eliminate pension (contributions pickups for TRS members.
The proposal makes no attempt to accelerate repayment of either fund’s unfunded liability besides the foregone conclusion that funds now used for POB debt service will be touted for liability reduction as the bonds mature.
The proposal also suggests a single governing board. With the funds remaining legally and organizationally separate. Some interesting operational and fiduciary duty questions there.
Notably, SERS and SURS are completely absent from the proposal.
Finally. A miscellaneous recommendation brings up the wildly unpopular downstate police/ fire pension fund consolidation. AA might be inclined to support this with two add-ons; first, that the City’s handful of funds like Laborers and MWRD go to IMRF, along with the consolidated police/fire entity.
Ok. now have at me.
- Steve Polite - Friday, Feb 10, 17 @ 11:21 am:
With all due respect, a worker making $45,000 is eligible for the earned income credit and pays little to no state income tax. Retirement income is not earned income.
- Anon - Friday, Feb 10, 17 @ 11:27 am:
=== because our income tax is flat, raising it hurts the working class disproportionately (because at their income they’re spending for more vital things than an upper income person is).===
That’s why the EITC should be boosted along with the personal exemption, to alleviate the impact on the working poor, who already pay the biggest proportion of their incomes in state and local taxes under the highly regressive tax system in IL.
- Rod - Friday, Feb 10, 17 @ 11:29 am:
Let’s be clear here the idea that Illinois should limit spending growth to 1.7% through at least FY2022 means no education funding reform as is currently being discussed. I am fine with that, a $3.5 billion to $6 billion increase in k-12 funding over a ten year period is not possible.
Most of the that increase allowed for in the Federation plan would probably be for small entitlement increases and possibly some wage increases for the lowest paid state workers.
- PublicServant - Friday, Feb 10, 17 @ 11:32 am:
5.25% is reasonable as is reducing it to 5%, if we haven’t gone with a progressive tax rate by then.
Pensions should be brought to an 80% funded level. No one needs the full amount of their mortgage on hand years before the mortgage is due.
Bond out the unpaid bills to avoid the high interest…Of course. Same goes for the pension debt.
Excluding B2B from any sales tax expansion ain’t gonna fly. Just sayin.
===A constitutional amendment limiting the pension protection clause to accrued benefits===
Ex post facto laws are prohibited in the US Constitution.
What’s most telling: No mention of the need for not even 1 of Rauner’s TA items. Fancy that, Bruce…
- 41st Ward - Friday, Feb 10, 17 @ 11:58 am:
Rich, I think you mean “Federation”
- Blue dog dem - Friday, Feb 10, 17 @ 12:39 pm:
Limit spending growth to 1.7%. That says it all.
- Former Merit Comp - Friday, Feb 10, 17 @ 12:42 pm:
Take out the tax on retirement income and the 100% funding on pension systems and I’m all for it!
- City Zen - Friday, Feb 10, 17 @ 12:54 pm:
==Pensions should be brought to an 80% funded level. No one needs the full amount of their mortgage on hand years before the mortgage is due.==
No, pension should be 100% fully funded. That would ensure those who consumed the services pay their full share of those services, those who provided those services have a fully funded retirement, and future taxpayers would only pay for the services they consume.
Funny how no one in the public sector pushes for full pension funding. It’s as if there’re trying to hide the true cost of their compensation.
- RNUG - Friday, Feb 10, 17 @ 2:01 pm:
== A constitutional amendment limiting the pension protection clause to accrued benefits; ==
Won’t fly. The IL SC has been clear.
- JS Mill - Friday, Feb 10, 17 @ 2:03 pm:
=Funny how no one in the public sector pushes for full pension funding. It’s as if there’re trying to hide the true cost of their compensation.=
Not really, I base my conclusion on industry best practice and recommendations which usually fall in the 80% range.
Full funding is even better.
But, again my conclusion is based on data, not a knee-jerk/emotional reaction or the desire to stick it to other people who have kept there end of the bargain.
- RNUG - Friday, Feb 10, 17 @ 2:07 pm:
== And while amending the state constitution eliminate all traces of public employee pension protection. ==
You can do that going forward with new hires but not existing employees.
- tobias846 - Friday, Feb 10, 17 @ 2:08 pm:
CityZen, a lot of retired people are just barely making ends meet. They spend a larger portion of their income on medical care, and have huge expenses looming when they can’t care for themselves anymore.
Slamming elderly people making under 50K with a 5 percent tax is going to be a hardship for them. It’s not like they can go back to work and make a little extra cash to stay afloat. Walmart doesn’t hire greeters anymore.
I keep hearing that retirees will flee the state if the exemption is eliminated, but the people who would suffer most from a tax are the ones who can’t afford to move.
- RNUG - Friday, Feb 10, 17 @ 2:10 pm:
== How about we just exempt Social Security income an any other retirement contributions that were already taxed and be done with it. ==
Teachers and some other government employees were not allowed by state law to participate in Social Security. You should at least give them an exemption equal to the average SS retirement income.
- tobias846 - Friday, Feb 10, 17 @ 2:20 pm:
Every time state pensions are in the news, people start screaming for a constitutional amendment that would allow the state to welsh on its obligations. This is just a silly fantasy, like Kristen McQueary’s dream of a Katrina-like disaster that would wipe the slate clean.
I sometimes hear “You won’t get your pension because there’s no more money!” My response to that is simple: “Yes, there is more money. It’s in your wallet right now.”
- RNUG - Friday, Feb 10, 17 @ 2:22 pm:
== Bond out the unpaid bills to avoid the high interest…Of course. Same goes for the pension debt. ==
Seriously doubt there will be any serious push to bond out the pension debt; that eliminates too much financial flexibility for the State.
- RNUG - Friday, Feb 10, 17 @ 2:31 pm:
Like -AA-, I can agree with most of what is being proposed here, including his suggestions. Depending on whether an exemption for retirement income is included and how big it is, the income tax rate may have to move up to near 5.5% to make things work.
- Sugar dad - Friday, Feb 10, 17 @ 3:16 pm:
Of course this isn’t civic committee. It is the CTBA.
- PublicServant - Friday, Feb 10, 17 @ 3:51 pm:
===Seriously doubt there will be any serious push to bond out the pension debt; that eliminates too much financial flexibility for the State.===
Because the current flexibility has worked out so well…just sayin.
- City Zen - Friday, Feb 10, 17 @ 4:00 pm:
==Teachers and some other government employees were not allowed by state law to participate in Social Security. You should at least give them an exemption equal to the average SS retirement income.==
Did teachers and some other government employees pay taxes on their pension contributions or where those contributions tax deferred like my 401k? That is the true differentiator. Treating social security, which I already paid taxes on, the same as pension income which was tax deferred is not equal treatment.
This “allowed to participate in social security” is by far the weakest argument in taxing retirement income. I am not allowed to participate, I am required. I can think of many better investments for 6.2% of my wages than SSI.
- City Zen - Friday, Feb 10, 17 @ 4:10 pm:
@JS Mill - One man’s conclusion is another man’s concealment. Actuaries have been telling anyone who will listen that idea that 80% funding level is healthy is a myth.
https://www.actuary.org/files/80_Percent_Funding_IB_071912.pdf
Fund those pensions 100%. That’s what’s fair. Then let’s see what’s left to cover raises, health insurance, etc. If there is money left, fantastic, everyone wins. If not, then some tough choices have to be made.
- Anonymous - Friday, Feb 10, 17 @ 4:39 pm:
What pension fund is 100% fully funded? Names?