What the next governor and legislature must do
Editor’s note: This is the first of seven weekly columns that offer a blueprint for “Fixing Illinois,” the title of the writer’s 2014 book (University of Illinois Press).
The first order of business in transforming Illinois from a laggard to a leader, once again, among the American states is to enact balanced budgets and create a stable, transparent, predictable fiscal system, something the state has not accomplished even once in the past two decades.
Only then will business leaders, entrepreneurs and creators be confident they can locate, build and expand in our state.
The numbers tell the sad story of our fiscal disarray. The 2017 Comprehensive Annual Financial Report of the Office of the Illinois Comptroller shows that the net assets of the state of Illinois declined from a negative $6 billion in 2002 to minus $141 billion in 2017. [This number will plummet even further next year, when new accounting rules require Illinois to report its unfunded future employee health care costs.]
Even with the return last year to an individual income tax rate of almost 5 percent (4.95 percent), the present 2019 fiscal year budget, ballyhooed by the governor and Legislature as balanced, will actually end the year with a deficit of about $2 billion, probably more. How so?
For example, buried in the murky detail of the $36 billion general funds budget is a provision to borrow $800 million from other special state funds—which will have to be repaid in subsequent years.
Then there is the James R. Thompson State of Illinois Center in Chicago. This is the third straight year the building has been sold, and the $300 million from the sale banked as revenue in each annual budget. Yet I swear when I walk by the spaceship-shaped building, I still see state employees walking in and out. That’s how you balance a budget in Illinois.
Readers might think it would be easy to find $2 billion of waste and corruption in the state budget, thus solving our problem. Actually, cutting has been going on since 2002, when Rod Blagojevich took office. In his first year, there were 82,000 state employees; today there are 59,000, a reduction of almost 26 percent.
Al Bowman, executive director of the Illinois Board of Higher Education, reports that state spending on our colleges and universities is less than half what it was in 2002. Further, appropriations and staffing for our overwhelmed state children’s agency are actually down, and, another of many examples, budget cuts have left our state parks decrepit.
We could cut more from higher education, probably driving even more of our students out of state, where they tend to stay upon graduation.
I simply can’t find $2 billion of waste and corruption left in our budget.
Three untouchables make up most of the general funds budget — pension costs, Medicaid and K-12 education, all of which grow, inexorably it seems. My friends say, “It’s simple, let’s cut back pension benefits.” But the state high court says we can’t. Spending for health care and education seems to move up, not down.
What to do? The transformative approach would be to broaden the sales tax to include many services, reimpose the tax on retirement income (excluding Social Security, and the equivalent income of pensioners not covered by Social Security), and eliminate a host of exemptions, exclusions from sales and other taxation.
This transformation could generate more than $12 billion, without increasing any tax rates, also balance the budget — AND reduce local property tax bills by one-third ($10 billion from the total of $30 billion paid annually in property taxes), a greater tax burden than of any state in the nation.
Economists would call this dramatic property tax reduction regressive (that is, bad), because most of the benefits would go to folks with above average income, and it would provide a windfall to property owners, who might see property values climb. Yet what a boost to our struggling economy!
But let’s get real. There are no giants today like one-term governor Thomas Ford (1842-1846). Facing state default, Ford induced a highly reluctant legislature into paying off fully, and painfully, holders of massive state bond debt, thus opening the state for equally massive Eastern investment.
More modest options being floated to balance our state budget include taxing retirement income (but who will sponsor the bill?), and a graduated income tax, as proposed by Democratic gubernatorial candidate J. B. Pritzker. I think the Pritzker idea is a bad one, certainly at this time; right now, our business climate is perceived to be among the worst in the nation. Higher tax rates for entrepreneurial job creators would wave another red flag at investors.
I do have a proposal for reducing our annual state pension payments of about $10 billion by $2 billion, enough to balance our budget, and still meet our obligations to pensioners. For that, come back to this space next week for my column on rethinking how we pay for pensions.