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

Posted on by Steve Reick | 1 Comment

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

Whatever Happened to the Party of Small Government?

“The natural progress of things is for liberty to yield, and government to gain ground.”  -Thomas Jefferson

“I want to run McHenry County…being an executive able to really change fundamentally the structure of government.”  -Jack Franks “The Download” WGN Radio (8/24/16)

McSweeney & Franks

NW Herald, AP File Photo

So it comes as no surprise that Chairman Franks has enthusiastically embraced Representative David McSweeney’s bill (H.B. 4244), which would allow voters in (only) McHenry County to abolish a township by forcing a referendum onto an election ballot with a petition containing signatures of at least 5 percent of voters from a previous comparable election.

Think about that for a minute. On April 4, 2017, an election was held in Algonquin Township to elect sundry township-wide officials, and the average turnout of the 4 races was 5,956. If all it takes to put a dissolution referendum before the voters on a similar, off-peak ballot is 5% of the vote, then all it would take is for 298 people to allow proponents to force a vote upon over 90,000 of their neighbors to abolish the township. All of the Township’s functions would be taken over by the County.

H.B. 4244 is the legislative corollary to the old line “bad facts make bad law”.  From a story in the Northwest Herald discussing the bill:

McSweeney’s bill follows on the heels of the in-house lawsuits, budget-busting legal fees and corruption allegations that have engulfed Algonquin Township.

“[Algonquin Township] is the best example of bad government,” McSweeney said. “It is a great example of a government that will hopefully be eliminated.”

Not that there’s any discussion in Rep. McSweeney’s bill of making proponents show how such a move would save taxpayers money. No, he’s using the current uproar over alleged actions of the previous road supervisor to create a larger and more centralized McHenry County government. Not that what’s going on in Algonquin Township is a model of rectitude, but once again we have a politician jumping in front of a parade as if he organized the thing. He’s making a naked appeal to emotion in order to avoid the heavy lifting necessary to prove his case.

Do you want to know what’s going to happen if this bill passes? You’re going to be one step further away from participatory democracy.

Last week, the McHenry Township Board met to consider adopting a motion to place a referendum on the November ballot to dissolve the Township’s road district and fold everything into the Township. It was pretty much assumed that a “yes” vote was a fait accompli. But a bunch of motivated citizens showed up and told the Board to prove their case. The final vote was 3-2 against the motion. Try doing that in front of the County Board with Jack Franks holding the gavel. In supporting McSweeney’s bill, Franks is quoted in the Northwest Herald: “We want to be a laboratory for the state.” The thought of that kind of power in his hands scares me to death.

It used to be you could count on Republicans to be the party of small government. There’s a principle long embraced by conservatives known as “subsidiarity”, which says that matters ought to be handled by the smallest, lowest or least centralized competent authority. Political decisions should be taken at a local level if possible, rather than by a central authority. Republicans used to believe in it; I still do.

Posted in Cost of Government, Local Government | Tagged , , , | Leave a comment