In a bow to political and economic realities, the organization representing Illinois' largest companies Tuesday unveiled a plan to pay off more than $130 billion in state pension debt largely through a series of tax hikes.
Under the proposal from the Civic Committee of the Commercial Club, the state would increase personal and corporate income taxes by 1 percentage point across the board, pulling in $4 billion. The group would net another $1.9 billion by beginning to tax retirement income, and $500 million by extending the sales tax to cover more consumer services.
That $6 billion a year in higher taxes would be matched by $2 billion in spending cuts, half in general state spending and half in trims to health insurance for state workers and retirees. But the plan notably does not include any projected savings from cuts in pensions by requiring workers to pay more, accept reduced benefits, or both.
Such an effort, even if upheld by the courts, would take too long to help a state that badly needs to begin achieving economic stability now, the group said in its report. And the group tacitly concedes that efforts to cut pension benefits will not be accepted in Springfield, where J.B. Pritzker, the state's new Democratic governor, and Democratic supermajorities in both the House and Senate are on record as saying the state must fully pay pensions that were promised to workers.
With pension debt growing and the state now with a $1 billion-plus hole in its annual budget, "we think action is required right now," said committee tax policy Chairman Jay Henderson, a former vice chairman of PricewaterhouseCoopers who serves on the boards of Northern Trust and Illinois Tool Works. "If we remove the uncertainty now, it really will change the fiscal climate of the state . . . and enhance the state's economic growth prospects."
"Uncertainty is what's driving people away now," added Mr. Henderson, saying he's basing his view on numerous "anecdotal comments from our members, who are the largest employers in the state."
The Civic Committee in recent years has taken somewhat similar positions.
The committee's new report downplays a possible state constitutional amendment or other potential steps to save costs, saying they would take years to implement.
Such steps "face uncertain paths and would take a long time," said Kelly Welsh, president of the committee and a Chicago attorney who most recently served as general counsel to the U.S. Department of Commerce during the Obama administration. If some of these steps do occur they will help, Mr. Welsh argued, but in the meantime the state no longer can afford to wait.
Specifically, the organization wants to take the current funding plan in which the state pays about $8.5 billion a year and add an extra $2 billion a year. Doing so would get the state to the actuarial level in just four years, and result in 93% funding of the pension plans by 2045. By paying earlier, the state would save at least $46 billion in interest costs on pension debt over the next three decades — not counting the potential upgrade of the state's bond rating and more economic growth, the report asserts.
Such "front funding" of pension debt has been recommended by numerous officials lately including Mr. Pritzker. But there has been no agreement on where to find the needed revenue.
Of the $8 billion in new revenue and spending cuts, roughly $3 billion will be needed each year to cover the state's growing structural deficit, according to the committee's math. Another $1.5 billion would go to pay short-term, non-pension debt; $1 billion into a new reserve fund; and $2 billion into the extra pension payment.
When debts have been reduced, the state might be able to reduce those new taxes, too, it added.
The committee's plan would draw very heavily on the tax hikes. It also would cap other growth in state pension spending to 2% a year.
Mr. Welsh said the new plan has been run past the governor's fiscal team, and "they're interested. ... They were very receptive and positive in terms of the dialogue."
Mr. Pritzker is scheduled to unveil his first budget in a speech on Feb. 20.
"Illinois group pushes tax hikes to cover pension debt" originally appeared on Crain's Chicago Business, a sister publication of Pensions & Investments.