Illinois has systematic problems with the way it spends tax dollars. Some analysts argue more revenue is needed to solve the state’s fiscal problems, but a recent study from the Pew Charitable Trusts found Illinois’ tax revenues have grown by almost 20 percent since just before the 2008 recession. Tax revenues have grown faster in Illinois than in any other state except North Dakota. Even when the tax reduction at the beginning of 2015 is taken into account, Illinois’ post-recession tax revenues exceed all states in the Midwest region. Illinois doesn’t have a revenue problem, it has a spending problem.
As of January 2014, Illinois had a state debt of approximately $321.4 billion, according to State Budget Solutions. Illinois’ state debt per-capita was $24,959, fifth-highest in the country. Although these figures are striking, the reality may be even worse than legislators let on. According to a report released in July 2014 by Truth in Accounting (TIA), Illinois ranked second highest in the country in per-capita debt.
When generally accepted accounting standards are used to determine Illinois’ debts and revenues, the deficit is considerably higher, TIA argues. The organization concluded $147.4 billion in promised retirements benefits are unfunded, yet the state reported on its balance sheet only $37 billion of these liabilities. Illinois hasn’t had a balanced budget since 2001.
Taking unfunded pension benefits and unfunded retiree health care benefits into consideration in the state’s total debt, TIA found Illinois had a shortfall of $175.7 billion, for a per-capita debt of $43,400. These deficits led credit rating agencies to give Illinois the lowest credit rating in the nation, and the state has not had a AAA rating since February 1979. Ninety percent of the state’s 2011 tax-hike revenues were not spent on education, health care, or transportation, but instead were put into the state’s pensions systems and pension obligation bond payments.
The Illinois Policy Institute (IPI) releases an annual State Budget Solutions Research Report outlining several measures the state can take to help fix and manage its budget. Its recommendations include reasonable spending cuts and reforms, state worker retirement reform, and increased means-testing for government benefits. IPI’s report found limiting state spending to the rate of inflation and population growth since 1979 would have cut spending by $10 billion in 2012. An across-the-board spending cut of 4.9 percent, a reasonable step, would save the state $1.8 billion in fiscal year 2015.
For years, states have been manipulating the market and favoring certain business sectors and individuals. Legislators should consider eliminating so-called “economic development” schemes, including film tax credits, government-owned golf courses, and publicly financed sports stadiums and convention centers, as first, basic steps toward fiscal responsibility.
The main problem affecting Illinois’ budget, however, is the growing liabilities of the state employee pension systems. Illinois should consider a hybrid pension system similar to that used in Utah, which in 2010 transitioned to a hybrid defined-benefit/defined-contribution system by allowing new employees to choose which type of pension they would contribute to. Utah’s reforms limit taxpayer exposure to the pension system by capping government costs: If the cost of maintaining the system increases above 10 percent of employee payroll, employees are required to contribute the difference. Workers covered by defined-contribution plans own and control their pensions and can change employers without losing their accrued benefits. IPI also recommends means-testing the cost of living adjustments (COLAs) of career state workers as an easy way to cut costs.
If Illinois does not implement sensible spending and pension reforms, more state workers will lose their jobs, taxes will increase further, more businesses and workers will leave the state, and essential public services will be crowded out. Illinois already leads the Midwest in depopulation and faces the slowest economic recovery in the region.
The following documents provide additional information about spending reform and Illinois’ budget battle and pension problems.
Ten Principles of State Fiscal Policy
http://heartland.org/policy-documents/ten-principles-state-fiscal-policy
The Heartland Institute provides policymakers and civic and business leaders a highly condensed, easy-to-read guide to state fiscal policy principles. The principles range from “Above all else: Keep taxes low” to “Protect state employees from politics.”
Budget Solutions 2015: Keeping Promises to Taxpayers and Turning Around Illinois
https://heartland.org/policy-documents/budget-solutions-2015-keeping-promises-taxpayers-and-turning-around-illinois
Budget Solutions 2015 offers a menu of reforms that can be used not only to allow the state’s tax hike to sunset but also to begin paying down Illinois’ backlog of bills. Tax relief is necessary, and Illinois needs bold leadership to make it happen, the report concludes.
Ten Ways to Balance the Budget Without Tax Hikes
https://www.illinoispolicy.org/reports/ten-ways-to-balance-the-budget-without-tax-hikes/
The Illinois Policy Institute outlines ten steps legislators can take to put the Illinois state budget on sounder fiscal footing without job-killing tax hikes.
State Budget Reform Toolkit
https://heartland.org/policy-documents/state-budget-reform-toolkit
The American Legislative Exchange Council outlines a set of budget and procurement best practices to guide state policymakers as they work to solve the budget shortfalls. The toolkit will assist legislators in prioritizing and more efficiently delivering core government services by advancing free markets, limiting government, and promoting federalism and individual liberty.
Policy Tip Sheet: Spending Reforms
https://heartland.org/policy-documents/policy-tip-sheet-spending-reforms
The Heartland Institute outlines several reforms state legislators can take to address spending problems, including privatization, tax and expenditure limits, and retirement reforms.
Research & Commentary: Public Pensions and the Assumed Rate of Return
http://heartland.org/policy-documents/research-commentary-public-pensions-and-assumed-rate-return
Heartland Institute Senior Policy Analyst Matthew Glans examines the problems facing state and local pension funds, how assumed rates of return affect pension fund debt, and proposals to change the projected rates of return on pension fund investments.
Balancing State Budgets the Smart Way
http://taxfoundation.org/article/balancing-state-budgets-smart-way
Joseph Henchman of the Tax Foundation examines an array of options states can use to remedy both short-term and long-term fiscal woes and put their budgets back on sounder legal footing.
The State Public Pension Crisis: A 50-State Report Card
http://heartland.org/sites/all/modules/custom/heartland_migration/files/pdfs/27578.pdf
The Heartland Institute examines problems currently facing public pension systems, including the enormous burdens public employee pensions pose in some locations. The report ranks each state according to the operation and relative disposition of its pension plans and suggests ways states can solve their pension system problems.
A Decade of TABOR—Ten Years After: Analysis of the Taxpayer’s Bill of Rights
https://heartland.org/policy-documents/decade-tabor-ten-years-after-analysis-taxpayers-bill-rights
Colorado’s TABOR (Taxpayer’s Bill of Rights) is a constitutional amendment limiting taxes and spending. Its stated mission is to “reasonably restrain most of the growth of government.” It allows only tax rate increases approved by voters, and although fees are not directly restricted, state government spending is limited to the growth of Colorado’s population plus inflation in the prior year.
Reason Foundation’s Annual Privatization Report
http://reason.org/news/show/1014235.html
The Reason Foundation reports states are increasingly partnering with the private sector to build roads and reduce traffic jams, which have become one of the biggest complaints among residents of nearly every mid- to large-sized city in the country. The report analyzes the latest developments in privatization and government reform in transportation, aviation, education, local government services, telecommunications, and eminent domain.
Keeping the Promise: State Solutions for Government Pension Reform
http://heartland.org/policy-documents/keeping-promise-state-solutions-government-pension-reform
The American Legislative Exchange Council (ALEC) describes the variety of pension plans governments use today and the advantages and disadvantages of each type. The paper describes several tools legislators can use to ensure governments can affordably fund retirement benefits for their employees.
Research & Commentary: Defined-Contribution vs. Defined-Benefit Pensions
http://heartland.org/policy-documents/defined-contribution-vs-defined-benefit-pensions
John Nothdurft, director of government relations at The Heartland Institute, provides a bullet-point comparison of defined-benefit pension and defined-contribution retirement plans.
Nothing in this Research & Commentary is intended to influence the passage of legislation, and it does not necessarily represent the views of The Heartland Institute. For further information on this subject, visit Budget & Tax News at http://news.heartland.org/fiscal, The Heartland Institute’s website at http://heartland.org, and PolicyBot, Heartland’s free online research database at www.policybot.org.
The Heartland Institute can send an expert to your state to testify or brief your caucus; host an event in your state; or send you further information on a topic. Please don’t hesitate to contact us if we can be of assistance! If you have any questions or comments, contact MaryAnn McCabe, Heartland’s government relations manager, at [email protected] or 312/377-4000.
Matthew Glans joined the staff of The Heartland Institute in November 2007 as legislative specialist for insurance and finance.