Fixing ‘Tier II’ issue can be both costly and an opportunity
Ralph Martire
Posted December 18, 2023 5:06 pm
By Ralph Martire
The General Fund budget Gov. Pritzker inherited from his immediate predecessor Bruce Rauner could charitably be described as a “hot mess.” It was running an operating deficit of 30%, which in turn had created a ginormous $8 billion backlog of unpaid bills. To be clear, that isn’t fiscally sustainable.
It also isn’t desirable, because lack of fiscal capacity on the front-end means the inability to fund services to adequate levels on the back-end. That’s no bueno, given that over 94% of all General Fund service expenditures cover the core areas of education, health care, social services and public safety — which are not only demanded by voters and taxpayers, but also provide direct and indirect benefits to everyone.
And while Rauner’s financial mismanagement made things decidedly worse, the truth is Illinois’ fiscal problems are structural, have vexed lawmakers for generations and are so bad they’ve forced real cuts to be made in those four core service areas for decades. Indeed, when Pritzker first took office in 2019, Illinois was spending some $8 billion, or 24.4% less (after adjusting for inflation), on education, healthcare, social services and public safety than it had back in FY 2000 under Republican Governor George Ryan.
To his credit, Pritzker largely put Illinois’ fiscal house in order. He reduced the General Fund operating deficit from 30% to below 2%, generated interest cost savings by prepaying loans and pension contributions, got the Unemployment Insurance Fund healthy and built-up Illinois’ rainy day fund from zero dollars — Rauner had totally depleted it — to north of $2 billion. This created the fiscal capacity to start making some enhanced investments in core services that had previously been cut — although total spending today is still below FY 2000 levels in real terms.
Unfortunately, recent projections show the General Fund deficit will begin to worsen next fiscal year and continue to deteriorate thereafter. And no, overspending is not now, and as the afore-cited data prove never has been, the driver of General Fund deficits. The real culprit has always been a poorly designed state tax system that fails to comport with the principles of sound taxation, doesn’t track the modern economy and hence fails to generate enough revenue growth to cover the cost of maintaining the same level of public services from one year into the next.
To top things off, Illinois is on the verge of incurring a significant new financial obligation. See, historically Illinois was exempt from enrolling the vast majority of state workers — or any public school teachers — in Social Security. Which means Illinois didn’t have to pony-up the 6.2% of payroll needed to contribute into the system. But that exemption only pertains for so long as benefits provided under Illinois’ pension systems are at least equivalent to benefits provided under Social Security.
In 2010, Illinois created a new, Tier II pension plan that not only provides a significantly lesser benefit than under the prior Tier I plan, it also requires that Tier II members pay the same portion of their wages for these lesser benefits as Tier I members pay for greater benefits. Besides being patently unfair, Tier II runs afoul of the rules that allow Illinois to avoid enrolling folks in Social Security.
Since Illinois can’t afford to enroll all exempt state employees — and all public school teachers — in Social Security, it’ll have to increase Tier II benefits. Paying for that will be a challenge, because current tax policy doesn’t generate enough revenue to continue funding what the state does today, much less handle new costs.
This conundrum actually creates an opportunity. After living for generations with flawed tax policies that force Illinois to underfund core services, lawmakers can use the need to solve the pending Tier II fiscal crisis as an impetus for reforming state tax policy to work in the modern economy, finally allowing Illinois to make adequate and sustainable investments in the core services that build better communities.
Ralph Martire 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. rmartire@ctbaonline.org
Above is from: https://www.dailyherald.com/20231216/columns/fixing-tier-ii-issue-can-be-both-costly-and-an-opportunity/
