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:

I AM NOT IN FAVOR OF BORROWING $107 BILLION TO PAY DOWN THE UNDERFUNDED PORTION OF ILLINOIS’ PENSION SYSTEMS. ALL THIS WOULD DO IS TRANSFER THE RISK OF LOSS FROM PENSIONERS TO BOND HOLDERS WITHOUT ADDRESSING THE UNDERLYING PROBLEMS WITH OUR PENSION SYSTEMS.

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.

Posted in Public Pensions | Tagged , | 1 Comment

Let’s Leave the Mud-Wrestling to the Democrats

Hail MaryWe’re all familiar with the term “Hail Mary”. It happens in football, and it happens in politics. The ad thanking Governor Rauner for all of the social-policy failures of his first term is just such a thing.

I’ll dispense with a discussion of how offensive it is on so many levels, others have said everything I could say. I’m sure the fevered minds who came up with this ad are looking in the mirror and congratulating themselves on how clever they are without giving a single thought to what it’s going to look like when we’re seeing it coming back at us in October.

The last 4 years have been a target-rich environment of failure, from going over two years without a budget to negotiating away every part of the “Turnaround Agenda” without getting anything in return. Everything confronting our state, from underfunded pensions to out of control property taxes to job flight, is being overshadowed by this ad. Not to mention the fact that this election will determine who draws the legislative map that will control the political landscape for the next decade.

We run a real risk of ending up with a billionaire Democrat who thinks that the office of Governor is an entry level position or one of two others who think that there’s no problem that can’t be solved if we would just raise taxes. So with everything that’s at stake, there’s plenty to distinguish the two candidates for the Republican nomination for Governor without resorting to the kind of mud-wrestling we normally see from Democrats. Let’s elevate the discussion, shall we?

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For Municipal Pensions, the Can Has Reached the End of the Road

Sidewalk“We shall walk with a walk that is measured and slow,
And watch where the chalk-white arrows go
To the place where the sidewalk ends.”

-Shel Silverstein “Where the Sidewalk Ends”

 

In 2014, Kevin Williamson used this as the title of an article he wrote for National Review, in which he describes driving from Pat Quinn’s hometown of Hinsdale, “where it’s easy to be optimistic”, down Route 55 (“the dyspeptic alimentary canal of Illinois”) to East St. Louis, where the rubber of sclerotic and unserious government meets the road of unintended consequences affecting real people. The saddest thing about the article is that, looking four years back in the rear view mirror, nothing has changed. Nothing, that is, except that now it appears that Illinois has finally reached the end of the sidewalk.

While I’ve been pointing out for years that the State’s 5 pension systems are headed for insolvency (the General Assembly’s pension plan is less than 14% funded), this particular crisis revolves around municipal pensions, particularly police and fire pensions. In August, a state appellate court ruled that as a matter of law, the City of Harvey’s firefighters’ pension fund had actually reached the point of constitutional impairment. This is the first time a court has made this determination on any governmental pension fund, and it opens up a whole new can of worms.

That’s because in 2015 a statute went into effect giving the Illinois Comptroller the authority to make up for any town or county’s delinquent pension payments by seizing its share of sales, excise, and other taxes collected by the state, collectively known as its “Local Government Distributive Fund” (LGDF).

This month, Public Act 99-8 fully kicked in. It says in pertinent part:

If a participating municipality fails to transmit to the fund contributions required of it under this Article for more than 90 days after the payment of those contributions is due, the fund may, after giving notice to the municipality, certify to the State Comptroller the amounts of the delinquent payments in accordance with any applicable rules of the Comptroller, and the Comptroller must…deduct and remit to deposit into the fund the certified amounts or a portion of those amounts from the following proportions of payments grants of State funds to the municipality:

(3) in fiscal year 2018 and each fiscal year thereafter, the total amount of any payments grants of State funds to the municipality. (emphasis mine)

Municipalities across Illinois are now confronted with the choice of cutting essential services or raising taxes to avoid having their pension contributions certified as delinquent, thus risking the loss of millions in LGDF funds:

During the upcoming session we’re going to see legislators tying themselves into knots to mitigate the change in Federal tax deductions with goofy schemes to create charitable deductions in exchange for state tax credits or property tax abatements, or invoking in loco parentis authority to ban tackle football for kids under 12. But at no time will we have an adult conversation about what’s about to be dumped upon thousands of unsuspecting citizens of Illinois.

Kevin finishes his piece this way:

“Driving though East St. Louis, you’ll see a dozen signs reading: “Casino — this way!” But you won’t see any pointing the way to jobs, prosperity, basic physical safety, or hope. Nor will you see them in Joliet, Carbondale, Rockford . . .”

And between now and May, you certainly won’t see them in Springfield.

Posted in 2018 Election, Public Pensions | Tagged , | Leave a comment

This Is What Happens When Democrats Do Tax Bills

Clown CarCombine a limitation on state and local taxes (SALT) under the new Federal tax bill with Democrats scrambling to score political points in an election year, stir in a dash of hypocrisy, and what do you get?

You get H.B. 4237, which was introduced in the Illinois House on January 16th.

The tax bill that Congress recently passed and which was signed into law limits the amount of SALT which can be deducted on an individual’s personal income tax return to $10,000, whereas before, this deduction was unlimited. As a result, people living in high-tax states like Illinois will possibly see their Federal taxes go up as a result of the limitation. (I say “possibly” because of potential offsets due to an increased standard deduction and a broadening of the base income levels subject to generally lower rates. Consult your tax advisor.)

I’m going to try to explain with a straight face why H.B. 4237 is going nowhere. It won’t be easy.

The bill provides for the establishment of what’s being called the “Illinois Excellence Fund”:

“The Illinois Excellence Fund is hereby created as a special fund in the State treasury. The Fund may accept contributions for exclusively public purposes, as specified under Section 170 of the Internal Revenue Code relating to charitable contributions and gifts. All moneys in the Fund shall be used for those public purposes, subject to appropriation by the General Assembly.

Any taxpayer who makes a contribution to the Illinois Excellence Fund is entitled to a credit against the taxes imposed under subsections (a) and (b) of Section 201 (of the Illinois Income Tax Act) in an amount equal to 100% of the contributions made by the taxpayer to the Fund during the taxable year.”

If this sounds eerily familiar to you, it’s because this is the same type of program that was contained in the education funding bill that was passed by the General Assembly in August allowing for the establishment of private scholarships. If you run into any of H.B. 4237’s sponsors, ask them what they had to say about that.

Without going too much into the weeds, this bill is going nowhere because it flies in the face of established Federal tax law.

At its most basic, for a charitable contribution to be deductible, it must be made without expectation of financial return. Here, the “contribution” is made with nothing but the expectation of financial return, i.e.: a reduction in one’s Federal income tax. Also, if the contribution results in the assumption of a liability by the recipient in the form of providing a dollar-for-dollar tax credit, the deduction would also be disallowed. For those and many other reasons, at the state level, this bill is a total non-starter.

But wait! There’s more! The bill goes on to amend the Counties Code to allow counties:

“To establish a fund in the county treasury for the purpose of accepting contributions for exclusively public purposes, as specified under Section 170 of the Internal Revenue Code relating to charitable contributions and gifts. All moneys in the Fund shall be used for those public purposes. The county may provide for a credit against the taxpayer’s property tax liability in an amount equal to the amount of the contribution.” (emphasis mine)

So what these geniuses are doing is telling counties that they can set up a fund to accept donations to be used for undefined charitable purposes in exchange for a reduction or elimination of your property tax bill, which will either raise taxes on everybody else or destroy the budgets of every school district and taxing body in the County. If you want to have some fun, show this to your local mayor or school board president and watch as their hair catches fire.

The article from the Tax Foundation linked above says it best:

“The scramble to restore the uncapped state and local tax deduction in high-tax states is…a curious political exercise, as it largely involves elected officials who have championed progressive taxation contemplating intricate, almost Rube Goldbergesque ways to make the federal tax code less progressive for wealthy taxpayers in their states.

If high-tax states are genuinely concerned that, absent federal subsidization of their tax rates, they might see outmigration or changes in taxpayer behavior, it would be more productive to revisit state tax rates than devising increasingly convoluted ways to enable high-income earners to reduce their federal tax liability.”

Amen to that.

Posted in 2018 Election, Property Taxes | Leave a comment