The Illinois Pension Deficit: How Should State Leaders Proceed?

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On May 8, the Illinois Supreme Court ruled unanimously against a bill meant to ease the burden of the Illinois pension deficit that former Governor Pat Quinn signed in December 2013.

This pension reform bill was the Quinn administration’s last-ditch effort to fix the public pension shortfall of more than $100 billion, which is looming over the 2015–2016 budget beginning on July 1. Current Governor Bruce Rauner has praised the Supreme Court ruling as “fair and right,” according to National Public Radio, because the state’s constitution prohibits public pension benefits from being “diminished or impaired.” The state still must find a way to fix its public pension and budget shortfall woes, however.

The True Depth of the Budget Shortfall

Illinois’s public pension deficit is the worst in the nation. The state owes $158 billion in past-due retirement benefits, according to government finance watchdog Truth in Accounting. The situation is so bad that each taxpayer would have to pay $45,000 to cover the overdue debts.

Starting July 1, state legislators must add another $6.8 billion to that debt, which is about a quarter of the state’s entire annual operating budget of $28 billion. What’s left has to cover needs such as schools, road and bridge repair, and public safety, just to name a few. Two solutions to this issue are being debated: raising income taxes and amending the state constitution.

Solution #1: Raise Income Taxes

Rauner ran on a campaign promise of not raising taxes to fix the state’s budget issues, and he intends to keep that promise. This includes allowing a temporary income and corporation tax increase enacted in 2011 to expire so that rates return to the state’s pre-2011 levels. Despite an extra $18 billion in new tax revenue collected during the hike’s lifetime, the budget and pension problems have grown to the proportions seen today.

When the state’s taxes went up, businesses shrank and residents fled the state. Monthly employment growth declined by a whopping 39 percent. In 2014, a record 95,000 more residents left the state than moved in, making it the worst population decrease in Illinois’s history.

While raising taxes sounds like a good solution to the Illinois pension deficit, the numbers don’t lie: It doesn’t work in the short or long term.

Solution #2: Amend the State Constitution

Working on the current budget is necessary, but Illinois still has to find a way to fix its ever-increasing pension problem. As long as the state’s constitution prevents any monkeying with public pension benefits that are more lucrative and protected than the private pensions paying for them, this battle will continue to move in an unresolved circle.

If Illinois legislators rewrite or amend the current state constitution, as Rauner is pushing for, they could reduce pension benefits for future workers. This would take some pressure off state coffers while leaving untouched any benefits that have already been earned.

This option isn’t an easy fix, and it would take some time. The earliest it could go to state residents for a vote is the November 2016 election.

Following the Supreme Court decision, it’s clear that Illinois’ new governor is stuck in a difficult situation. The solution is chosen could affect how other states handle similar public pension deficit crises, giving the Rauner administration a prime opportunity to prove that taxes aren’t the answer.