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January/February 2011 Newsletter

Budget Crisis in Illinois

These are difficult times and the problems we face in state government have no easy or pleasant solutions.

With apologies to those that already received this information, I wanted you to know why I supported the new revenues that passed the Illinois General Assembly in January.

I recognize that the action we took to raise revenue is difficult on families and businesses and that it is not popular, but it was necessary at this time in order to stave off even more dire financial consequences for all of us.  The choices were not good – they were “bad” and “worse”.

Illinois was on the brink of fiscal failure.  Our revenues were down 25% over the last two years due to the recession.  Our bond rating was going to be downgraded to junk status in a matter of weeks (if not days) had the legislature failed to act and the message being sent by the credit default swap market on Wall Street was that Illinois was significantly more likely to default than even six short months ago.

Our inability to pay bills was causing state vendors – including hundreds of local Illinois small businesses –  to lay off employees or, in severe cases, close down.  Further delay or failure to pay our vendors, suppliers and others who receive state funding could have resulted in tens of thousands of additional employees losing their jobs. This means a crisis in our schools, libraries, nursing homes, hospitals and many other services on which we rely.

So to avoid a complete meltdown, I supported the revenues.  But before doing so, I proposed and was successful at getting a first-ever spending cap in the legislation.  The spending control is a set dollar amount – not a formula that can be manipulated.  If the legislature passes a budget that exceeds the spending cap, the increase in the income tax is automatically repealed.  This heavy hammer is necessary to impose the discipline on spending that the state has previously been unable to muster.

There are those who say the spending control is insufficient because it grows by 2% per year.  But with health care costs (one third of our budget) growing at 8 to 10% per year and pension costs growing at a similar rate, the spending control will force additional budgetary cuts over the next four years.

Bond rating agencies have also pointed to the spending controls as a positive development in stabilizing Illinois’ bond rating.

Fitch Ratings wrote in its recent report regarding Illinois:

“The increase in tax revenue, in conjunction with newly enacted hard spending limits, provides a means for the state to return to budgetary balance over the next three fiscal years.”

See the comments from Standard & Poor’s:

http://www.chicagobusiness.com/article/20110125/NEWS02/110129911/standard-poors-view-of-illinois-improves-with-tax-hike#ixzz1C4dd9CNJ

It certainly would have been my preference to do this differently.  I would have preferred to make additional spending cuts first and in fact I worked with a nine other legislators last spring to propose cuts of over $1.3 billion from our budget.   But almost none of those cuts were supported in the legislature – by either Republicans or Democrats.

And we have made cuts.

·         16,000 fewer state employees than there were in 2002 while our state population has grown over 4%

·         Legislators and state employees have taken furlough days resulting in $25 million in savings

·         Legislators have reduced travel reimbursements

·         Cuts in grant programs for human services, education, public health and senior programs have exceeded $282 million

·         Pension reforms will result in at least $77 billion in savings

Additional cuts will be necessary in all future budgets.  The new income tax rate raises approximately $6.5 billion.  Our current annual structural deficit is about $6.5 billion but we also will be using a significant portion of the new revenue to pay down the $8.2 billion in unpaid bills that have built up over the last several years. Estimates are that we will have to cut $2.2 billion from the budget over the next four years.

Pension costs remain a big part of the spending pressure we face and additional work remains to control those costs.  While the pension reform we passed last year will save billions, as a member of the House Personnel and Pensions Committee, I will continue to be an outspoken leader in the Illinois House on this very issue.  For more information on the pension challenges we face, please check out:

(See pension discussion below)

Again, I know this is a difficult time.  Families and businesses are suffering.  But like Illinois, most states are experiencing budget shortfalls.   The Center on Budget and Policy Priorities reports that in 2008 and 2009, 13 states raised new revenue from personal income taxes, 17 enacted sales tax increases, 22 increased taxes on tobacco, alcohol or motor fuel, 17 increased business taxes and 24 increased fees or other taxes.  More followed suit in 2010.

Again, I appreciate your willingness to read through my thoughts.  Thanks so much.

Pension Discussion

The General Assembly passed historic pension reform legislation in the spring of 2010.  This bill affects all employees (state employees, university employees and teachers outside the City of Chicago) hired after January 1, 2011.

The legislation sets the retirement age at 67, the highest in all 50 states.  It lengthens the amount of time to vesting, caps the amount of salary that is pensionable and dramatically reduces the cost of living adjustments that are received after retirement.

The Illinois Constitution contains no prohibition against reducing pension benefits for employees not yet hired. But Article 13 Section 5 states that:

Membership in any pension or retirement system of the State, any unit of local government or school district, or any agency or instrumentality thereof, shall be an enforceable contractual relationship, the benefits of which shall not be diminished.  (Emphasis added)

This provision makes reducing benefits for those already employed much more complicated.  Unlike the private sector that that got out of pension plans, and did so with fewer legal hurdles, the public sector is not quite as clear cut.  That being said, I am willing to consider ALL options to see if something can be done, but there are no easy answers.

The first hurdle is the Illinois Constitution quoted above.  I read the legal memo drafted by Sidley & Austin (and relied on by the Chicago Tribune) which says that the Constitution will not prohibit a diminishment of benefits for current employees so long as we don’t take away what is already “earned”.  The legal memo, however, does not address several issues which I believe could be important in the interpretation by a court of the Constitution. First, the memo fails to address whether there is a legal distinction between public and private sector pensions because public employees actually pay in to their defined benefit plan – as much as 11% of their salary.  Does that change the concept of their “vesting” in the pensions or our ability to change their benefits?  Second, the memo makes no mention of the legislative history of the Constitutional provision in question.  There were amendments offered to the “diminshment” provision as it was being debated that would have allowed the state to diminish benefits in the event of a fiscal crisis.  That amendment was expressly rejected by the sponsor of the amendment.  The stated goal of the sponsor of the provision was to absolutely protect all pension benefits. Understanding the legislative history would be critical to an accurate interpretation of the provision.  Finally, the legal memo does not discuss the impacts of any collective bargaining agreement on the pension benefits.

Another hurdle in reducing pension benefits for current employees is that we are so underfunded (from decades of underfunding) that if we remove all future employees from the plan, for example, going to a 401(k) style plan, it will increase the current required state contribution so much that it is simply unaffordable.

Again, I am not saying these are hurdles that cannot be cleared, but level of confidence on how we would clear them is currently not too high.

I am aware of three states that have passed legislation reducing benefits for current employees or requiring increased contributions from current employees for their existing plan.  All three are currently in litigation – an outcome we can expect if Illinois were to follow suit.

 

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