Without shift on tax policy, pensions and structural deficit threaten crisis for state

 
By Ralph Martire
Guest columnist
Updated 7/30/2021 12:22 PM

Consider everything that feeds the creation of public policy. There are lobbyists, rallies and marches. Don't forget charged rhetoric, clever spin, campaign contributions and the ever-popular backroom deal. Then there's ideological talking heads spewing misinformation to support their world view. Not to mention the constant pressure on legislators to garner some short-term political advantage to use in the next election cycle. The one, critical element missing from all this chaos: long-term planning.

The political process simply does not reward politicians for proposing long-term solutions to complex problems -- especially when those solutions come with short-term costs. Which explains why Illinois' fiscal shortcomings have been so intractable. After all, resolving fiscal issues requires, among other things, an honest, public debate about tax policy, which is about as rare as a Super Bowl victory for the Bears.

 

Rather than engage in such meaningful discourse, there's been a pervasive -- some would say perverse -- tendency of most politicians (Gov. Pritzker excepted) to eschew long-term, tax policy issues, to instead focus on getting through "fiscal year now." And that's had some frighteningly bad consequences, not the least of which is the structural deficit in Illinois' General Fund.

A "structural deficit" exists when, even during normal economies and when no services are added or expanded, revenue growth doesn't cover the cost of providing the same level of public services from one fiscal year into the next, adjusting solely for inflation. The structural deficit in Illinois' General Fund has persisted for generations. Which is no bueno, given that over 95 percent of all General Fund spending on services goes to the core areas of education, health care, social services and public safety.

Unfortunately, eliminating the structural deficit necessitates modernizing the tax system to generate adequate revenue growth -- which is something the political process strongly discourages. So in lieu of that, Illinois decision-makers have relied on the irresponsible practice of diverting revenue that should have funded pensions, to instead maintain spending on services despite structural deficit induced revenue shortfalls. Sure, that allowed Illinois to provide a level of public services it didn't have the revenue to fund, but it also meant the state was hiding the structural deficit by borrowing billions of dollars from what should have been contributed into the pension systems.

Then to make matters worse, in 1995 Illinois enacted the "Pension Ramp," which created a 50-year plan for repaying the immense pension debt it was incurring. The Pension Ramp, however, was a boondoggle. It established a repayment schedule that, for its first 15 years, continued the practice of underfunding the pensions by tens of billions. Thereafter, it called for annual repayments of pension debt that were so unaffordably backloaded, they increased annually by increments which exceed both inflation and General Fund revenue growth.

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The deleterious impact of Illinois' structural deficit is laid bare by the FY 2022 General Fund budget enacted last month. Consider that this budget increases spending on the four core services by $586 million -- or just 0.13 percent -- over FY 2021 levels. Sure the bump is small, but things have to be trending up to cover any increase at all, right? Well, no, actually.

As it turns out, that year-to-year increase in General Fund spending is less than the $655 million in new revenue the state raised this year by eliminating some corporate tax breaks -- and significantly less than the $3.8 billion in federal pandemic relief being utilized in FY 2022.

See, under President Biden's American Rescue Plan Act, as well as other previous federal initiatives, Illinois is receiving $12 billion to cover General Fund expenditures over fiscal years 2021 through 2024.

That is great, except that this federal assistance is one-time revenue that's not available after FY 2024. So come FY 2025, Illinois faces a huge fiscal cliff that threatens its capacity to maintain spending on any of the four core services, unless before that fateful day, decision-makers finally enact the tax policy reforms needed to eliminate the structural deficit and create a rational repayment plan for the state's pension debt.

• Ralph Martire, rmartire@ctbaonline.org, is executive director of the Center for Tax and Budget Accountability, a fiscal policy think tank, and the Arthur Rubloff Professor of Public Policy at Roosevelt University.

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