“We cannot solve our problems with the same thinking we used when we created them.” – Albert Einstein

Posted on by Steve Reick | 1 Comment

Governor, Don’t Mangle the Only Chance You’ve Got

“Mendacity. What do you know about mendacity? I could write a book on it…Mendacity. Look at all the lies that I got to put up with. Pretenses. Hypocrisy…Boy, I’ve lived with mendacity. Now why can’t you live with it? You’ve got to live with it. There’s nothin’ to live with but mendacity. Is there?” – “Big Daddy” Pollitt, Cat on a Hot Tin Roof

The most mendacious thing said in a campaign filled with mendacity came last night when Bruce Rauner said: “I am honored and humbled by this victory.”

He should be humbled – he should’ve lost. Honor? Calling Jeanne Ives “Madigan’s favorite Republican” may have swayed enough people to put him over the top, but the smell it leaves behind is the smell of mendacity, and it will carry through to November.

A friend of mine observed early on that Bruce Rauner looks at the members of the General Assembly, especially the Republican members, as employees at a company he just bought that he wouldn’t have hired had he been in a position to do so in the first place. That pretty much sums it up.

So Governor, now that we’re stuck with you, here’s a little bit of advice. You need us more than we need you. The only way you can win in November is if Republican House candidates drag you across the finish line. But for that to happen, you’re going to have to check your ego at the door and accept the General Assembly as a co-equal branch of government and admit that we don’t work for you.

For a guy who made a fortune analyzing numbers, you’ve done a lousy job of understanding the rule of 60-30. You’ve been in office for almost four years and still haven’t figured out that the only way to get rid of Mike Madigan is for Republicans to pick up nine seats in November. The real action needs to happen in the House races, but can you set your ego aside long enough to let that happen? I’m afraid that what we’re going to get is seven months of you chanting Madigan! Madigan! and more Madigan! with the hope that repeating it often enough will make him disappear. Do that and you’ll let the only chance you have slip away, and with it the State of Illinois, because the last thing we need is another billionaire who thinks that Governor is an entry-level position.

Governor, you’ve managed to mangle pretty much everything you’ve touched since you got elected. If you want a second term, don’t mangle this.

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Shifting Education Costs the Other Way: Onto the State

In my last post, I said that the pension cost shift that the Governor proposed in his budget address is nothing but an attempt to balance the State’s budget on the backs of property taxpayers, and that I would not support it.

However, consider the intersection of the following two points:

  • “The State has the primary responsibility for financing the system of public education.” Constitution of Illinois, Article X, Section 1
  • “In our system, the state gets pension bills and just pays the tab.” Governor Rauner’s Budget Address

If pensions are part of the “system of public education”, then it’s entirely reasonable to put that cost onto the State. However, what if we went further and imposed the full constitutional imperative for education funding on the State, rather than just pensions? What would such a change look like?

If we’re to lower the burden on property taxpayers, the first thing that would be needed is some way to limit the amount that could be levied for schools. And for the State to assume its constitutional duty of 51% funding, it would have to find an additional $3.2 billion in revenue.

As it turns out, there’s a bill currently in the Rules Committee (where all good bills go to die) which would go a long way towards doing just that. H.B. 4042 was filed on May 1 of 2017, a bill on which I’m a chief co-sponsor. While it wouldn’t put the entire cost of education onto the State, the bill would limit the amount that could be levied for schools to 4% of equalized assessed valuation (EAV), or 1.33% of fair market value. In exchange for that reduction, the state income tax would be raised by 1%. Doing so would almost exactly offset the reduction in property taxes provided for in the bill.

After doing some research, I’ve concluded that instead of increasing the income tax to provide the offset, the state sales tax should be the vehicle for raising the additional revenue. Here’s why:

  • We just raised the income tax to 4.95%, and raising it further would serve to drive more people out of the state.
  • The current state sales tax rate of 6.25% has not been raised since 1990. A dollar in 1990 is currently worth $.53.
  • If there’s ever a move toward implementing a “destination based” sales tax, having sales taxes be the source of education funding before the fact would mean that revenues derived from it would be available to contribute to education cost. There’s a case currently before the U.S. Supreme Court which may very well grease the skids toward that result.
  • We now live in an economy where services are a much larger percentage of what we spend, and broadening the base of services which would be subject to the sales tax would allow the increase in the rate of tax to be less than would be the case if we didn’t broaden it.
  • Our surrounding states include a much wider range of services in their sales tax base than does Illinois, where we generally limit service sales taxes to utility fees.
  • Illinois does not currently tax retirement income, but everyone collecting a pension shops.

I asked the folks at the Commission on Government Forecasting and Accountability (COGFA) to provide me with an estimate of how much the sales tax rate would have to change to provide the $3.2 billion offset to property taxes, and their answer was an increase of 2%, to 8.25%. That did not take into account broadening the service tax base as provided above nor any destination based sales tax, so the rate increase would likely be less.

I calculated my own property taxes using the levy limitation provided in H.B. 4042 and found that I would save $1,770 per year, in my case a 28% reduction. I’d have to buy an awful lot of taxable stuff to pay that much in sales tax.

Shifting the burden of education funding to sales taxes is something that was done in Michigan back in the 1990’s, where the entire cost of education is paid for that way. Click here to see a Power Point presentation showing how it works.

So how does this tie in to the cost shift? As I said before, I haven’t heard anyone complaining about putting school districts on the hook for both the employer and employee share of pension costs, so long as it doesn’t result in higher property taxes. In fact, it would probably deter school districts from doing such things as spiking salaries so as to boost post-retirement pensions. We’d have to make adjustments to the recently passed school funding formula to take the shift into account, but again the issue here is one of who pays the bill.

I’ve spoken to several school superintendents who brought up a couple of sound points:

  • Given the labor laws in Illinois, districts have less leeway than we think in negotiating labor contracts. Without a prohibition on teachers’ ability to strike, unions have school districts over a barrel.
  • The State has imposed over 200 unfunded mandates on schools since 1992. (By the way, here’s another one that’s just been proposed, and it’s a doozy.) Mandate relief is sorely needed.
  • Finally, and probably most important, is that as bad as the property tax burden is, at least they know that the money will be there, unlike the uncertainty that would arise by expecting the State to fulfill its responsibility to consistently fund education. I can’t say that I disagree with them on this point.

Some may ask: “My property tax levy is less than 4% of EAV. Why should I sign on to an increase in the sales tax which won’t give me a corresponding reduction in property taxes?”

My answer is that there’s a cancer spreading throughout Illinois, and healthy communities aren’t immune from its spread. Take for instance the south suburbs in Cook County, where there’s a vicious cycle of high property tax levies leading to ever greater blight and decline. How long will it take for that blight to spill over into the healthier communities on their borders and then beyond? If this state is ever going to come back, it needs to create economic growth in those very areas that now cannot compete because of the crushing burden of high property taxes. It’s going to take a commitment from all of us, and it must begin with accepting the fact that economic decline in one part of the state affects those who haven’t yet seen it on their doorsteps, because if we don’t make that commitment, it will certainly find us.

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The Gun Violence Restraining Order: Common-Sense Reform?

In response to the shooting at the Parkland, Florida high school, we’re going to be discussing gun control issues in Springfield again next week. The senselessness of this shooting underscores the need for a rational debate on what steps can be taken to stop them without infringing upon the exercise of an individual’s Second Amendment rights.

We’re going to hear proposals for “common sense reforms” which the proponents will say will prevent future mass killings. But banning certain types of weapons represents a “collective punishment” in which the rights of the law-abiding are restricted with no real evidence that their “reforms” will work.

There’s a common thread that runs through the shootings at Fort Hood, San Bernardino, the Charleston, South Carolina church, the Orlando nightclub, the Sutherland Springs, Texas church, and Parkland school: each happened after federal authorities were given plenty of notice to stop them. What good is “if you see something, say something” if those to whom you say it, who have the authority, don’t do something? We have policies already in place which may have stopped these killings, it was human failure that stood in the way, and no amount of “common sense” gun legislation is going to stand in the way of blithering incompetence.

There are those who’ll say “what about the Las Vegas massacre? There was no advance warning.” You don’t need an AR-15 or a bump stock to inflict mass carnage; just ask Timothy McVeigh.

Continue reading

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Cost Shifting is Buck Passing By Another Name

Pass the BuckGovernor Rauner certainly got everyone’s attention last week when he proposed that the employer’s share of pension costs be shifted from the State to local school districts.

The pension shift has been a topic of conversation for some time. House Speaker Michael Madigan said as long ago as 2013 that there would be a shift, and the Budget Implementation Act (BIMP) passed in July contained a shift.

Last Wednesday, the Governor signed onto the deal, laying out a plan to pass the buck transfer the State’s responsibility for pension contributions to local school districts over a period of four years.

But there’s one line from the address that can’t be disputed:

“If you separate the payment from accountability … there is no accountability. People don’t question the expense, they just pay it… In our system, the state gets pension bills and just pays the tab. Our budget proposal shifts costs closer to home, so people can question expenses and deal with them more directly. Now, they have no incentive to manage costs because the state picks them up no matter what they are. When they are responsible for paying the bill, there will be plenty of incentive to lower costs.”

There are two distinct issues here. While school districts do not set either the benefit levels for pensions or the amount that employees must contribute to their own retirements (that’s the State’s responsibility), they are in charge of negotiating employment contracts. This has led to the common practice of spiking, where districts grant increased salaries in the last 4 years of employment, increasing the pension cost to the state with no repercussions to the district. Putting districts on the hook for pension payments puts them on notice as to the true cost of employing someone. I haven’t heard anyone criticizing the cost shift for that reason.

The big issue is the impact that the shift will have on property taxes. Obviously, if districts are forced to pick up both components of pensions, somebody has to pay the bill. The Governor made vague promises to “give schools and local governments the tools they need to more than offset the costs.” The tools include increased education funding, the power to dissolve or consolidate units of local government, and more flexibility in contracting, bidding and sharing services.

Pardon my skepticism. We just passed a new funding formula that is supposed to put $350 million of new money into our public schools; I don’t remember any of it being appropriated to pay for pensions (except, of course, for the amount used to move the Chicago Public Schools closer to the head of the line when getting that new money). Consolidation is on everyone’s radar these days, but even if consolidation saves money, it won’t come close to offsetting the increase in pension cost. Contracting and bidding flexibility? C’mon, remember who’s still controlling the House.

Standing alone, the cost shift is a lousy idea, and I won’t sign onto the Governor’s plan to balance the State’s books on the backs of local property taxpayers. But, what if the cost shift could be used as a catalyst for true reform of our completely dysfunctional tax system?

Stay tuned.

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It’s Not the Pension (Entirely), It’s the Debt

Dead End“If something cannot go on forever, it will stop.” – Herbert Stein’s Law

In his budget address this week, Governor Rauner made big news by proposing that the employer portion of the normal costs of teacher pensions be shifted from the state to local school districts. While I’ll have something to say about that shortly, I’d like to focus on what the “cost shift” is not.

There are two aspects of Illinois’ pension crisis that need to be kept separate from one another if we’re to have a sensible discussion of how to fix either one.

The first is the “normal” cost, which is the amount that must be set aside each year to pay for current-year accruals to the pension funds. That’s an ongoing obligation that, for lack of a better description, is forward-looking based upon salaries paid in the current year.

The other aspect, and in my mind the more difficult one, is the debt that has been allowed to pile up over past years because of chronic underfunding, investment performance that hasn’t kept up with investment assumptions and overly-generous benefits granted without thought of how they were going to be paid for.

The debt portion is not part of the cost shift proposal. Only current employer costs are included in the shift. It’s the debt portion I’d like to discuss here.

Since the Illinois Constitution is pretty plain in its language dealing with the enforceability of pension obligations, there’s no getting around the fact that the debt will somehow have to be paid (short of a Constitutional amendment removing the guarantee, which just ain’t going to happen, at least in my lifetime).

I’ve been harping on the debt issue since before I took my seat in the House, and it’s finally getting a hearing. The State Universities Annuitants’ Association (SUAA) has proposed that the state borrow $107 billion to fully pay down the underfunding. A hearing was held several weeks ago in the Personnel and Pensions Committee in which a professor from the University of Illinois laid out the borrowing plan and discussed how it would work.

I want to make it plain right now:


With that out of the way, I do want to commend Representative Robert Martwick for starting the conversation of how we get out of this mess. In spite of what you might have read, he’s not proposing that this plan be adopted, he’s on record as saying that he doesn’t know, and the reason he brought it before the committee is not because he thinks it’s such a great idea, but unless we at least start that conversation, we’re never going to get anywhere. I wholeheartedly agree.

There are several other proposals that have been floated for reducing the debt, most of which involve buying pensioners out of their entitlement by paying them some discounted amount of the present value of their future payments (here, here, here and here). All of these proposals are worth looking at, not because they’ll be the silver bullet that solves the problem, but that they all move the needle toward a lower level of pension debt, eliminating the low-hanging fruit, as it were. Also, I think all of them are constitutional.

On Tuesday there will be another hearing of the Committee in Chicago to discuss other possible means by which the debt can be paid down. If you’re interested in learning more, the hearing will be streamed live on ilga.gov. You should take the time to listen because, after all, it’s your money.

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