Giving Seniors a Break on Taxes

icr-logoIllinois taxpayers get a bit of property tax relief through a credit off their income taxes equal to 5% of the taxes paid on their principal residences. For instance, taxpayers paying $5,000 in property taxes will get a credit against their income tax of $250. Not much, but it’s better than nothing.

However, the credit is “non-refundable”, which means that if it exceeds one’s income tax liability, the balance isn’t refunded to the taxpayer. This affects seniors particularly, since a great number of them live on pension and social security income, which is not taxable in Illinois. Thus, most seniors have no income tax liability and do not benefit from the credit.

Until we find a way to reduce property taxes for everyone, I’m making an effort to reduce taxes for those living on fixed incomes with H.B. 3013, which makes the property tax credit refundable for people over 65 whose federal adjusted gross income (the starting point for calculating Illinois income tax) is under $50,000.

While individually this credit usually won’t be much, it may help a senior citizen with an electric bill, some groceries or a prescription. Anyway, we’ll keep taking small steps until we figure out how to provide substantive relief to everyone in the state.

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Putting the Brakes on Unfunded Mandates

manwithemptywalletThe biggest issue in the past election was the out-of-control property taxes that are driving businesses and residents out of McHenry County and out of Illinois. I ran on a promise that I’d do my best to bring down that property tax burden by focusing on changing the way the state pays for education.

While the Governor’s bipartisan task force moves to turn its framework report issued last week into legislation, I’ve looked at other ways in which we can begin to bend the cost curve of education downward.

Unfunded mandates are one of the biggest drivers of increased property taxes in McHenry County. The practice of imposing regulations and programs upon our school systems without providing the funding to pay for it, thus putting the burden upon local property owners has gone on long enough.

One of the first bills I sponsored in Springfield is H.B. 378. It’s a bill that was proposed in the last session of the General Assembly but failed to make it out of the Rules Committee, where good legislation often goes to die. I picked it up and resubmitted it for consideration in this session.

In its simplest terms, it’s a bill that provides that if a rule is proposed under the Illinois Administrative Procedure Act, then any interested party may request a ruling as to whether the rule is a “State Mandate”. If the rule is found to be a State Mandate, then all of the time periods for objecting shall be tolled, and no “Certificate of No Objection” may be issued (clearing the way for implementation) until the rule has been approved by a joint resolution of the General Assembly.

My bill does not stop the Illinois State Board of Elections from proposing and implementing new rules and policies, but it will give taxpayers the opportunity to fully assess their cost and push back against their implementation.

Furthermore, the requirement of a joint resolution places political accountability upon the General Assembly to raise taxes through an unfunded mandate instead of passing it off to unelected members of a state commission or agency. We’ve seen too many instances of Federal agencies such as the EPA imposing costly restrictions upon businesses and individuals, while Congress hides behind a wall of unaccountability. This bill short-circuits that process for state mandates on schools.

What I hope to accomplish with this H.B. 378 is to reduce the burden of unfunded mandates by placing the political cost upon those who have to stand in front of the voters every 2 or 4 years. I’m not optimistic for its passage; after all, it puts politicians into a position of having to take ownership of something that may cost them votes, not to mention the fact that the Speaker controls what bills ultimately make it to a vote on the House floor. But those aren’t good enough reasons to not give it a try.

Posted in Cost of Government, Education, Property Taxes | Tagged , , , | 1 Comment

Illinoyances is Taking the Summer Off

2010 BWCA Trip 011**UPDATE** Well, I’ve been sworn in, so now it’s time to fire up Illinoyances once again. I’ve also got a legislative website which will contain press releases and things of general interest. But this site will hopefully give you some background of the things you see there. Please check back often.

For those of you who check here regularly, I want you to know that since I’m now the official Republican candidate for the General Assembly from the 63rd District, all of my blogging and such will be done from my campaign website: www.steve463.com.

Wish me well, fellow travelers, it’s going to be a bumpy ride.

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The Governor’s SOTS Speech, What He Said and What He Didn’t Say

Reboot

Scott Stantis, Chicago Tribune

Every “State of” speech I’ve ever heard follows the same script:

  • A recitation of accomplishments achieved since the previous speech;
  • A shopping list of proposals to be addressed before the next one; and
  • A reminder that those who stand in political opposition to those proposals will be held responsible if those proposals don’t get enacted.

Governor Rauner’s speech yesterday followed the script for the most part, and revealed some interesting insights.

The list of accomplishments, from new measures to reduce fraud to coordinating among agencies that provide care to those in need speak to a change in emphasis away from enacting programs merely for the sake of enacting programs to developing a more comprehensive management style that will hopefully provide savings down the road. While the biggest issues that confront Illinois remain, this move toward measuring outcomes as a function of the cost of inputs is a step forward.

Unfortunately, the shopping list of proposals for the coming year is the same as we heard last year. The most critical are pension reform and education funding.

We have yet to adopt true pension reform. While it’s a far cry from the defined contribution proposal that the Governor ran on, his move toward accepting the pension bill sponsored by Senate President Cullerton is a sign of compromise brought about by the realities imposed by the pension guarantee language in the Illinois Constitution. I’m not sure if Cullerton’s bill would pass Constitutional muster any more than the House bill that was passed in 2013, and if it doesn’t, we’re going to be another year down the road with no solution.

And it’s not just about the type of plan going forward. While Governor Rauner touched on it when he said that the State is obligated to pay $7.6 billion into its 5 plans this year, he didn’t explain what that does to the process of putting together a budget. That $7.6 billion is a full 24% of the state’s general revenue, and of that amount, almost $6 billion goes to pay the underfunded portion. If general revenues come in at $32 billion, only $26 billion is left for all other state programs. And this is supposed to go on until 2045. We can’t continue to do business that way.

If there’s one issue that motivates the average voter in McHenry County more than any other, it’s property taxes. Without education funding reform, our taxes are never going to come down.

While the governor laid out an ambitious plan to address school funding, there was one essential element missing from his plan: parents. His 10-point plan was long on benchmarks, school district flexibility, reduction of administrative cost and partnerships between schools and employers, but nowhere was there a proposal to give parents greater control over their own kids’ education.

I would like to have seen him embrace the Educational Choice Scholarship Program as is currently in place in Nevada, where parents get access to an account loaded with the level of state funding allocated to each child. Parents are then free to use that money for private schools, tutoring, online learning, transportation, extra-curriculars or home schooling, or any combination thereof that they determine is in the best interests of their children. We’re never going to achieve savings in education costs, and our property taxes are never going to go down until we stop calculating the cost to educate a kid and then give that money to a school district to spend according to its priorities and those imposed by the state.

The third element of the script was perhaps the most telling. If you read the transcript of the speech, you’ll see that the governor did not discuss the elephant in the room: the current budget impasse. Nor did he utter the words “Speaker Madigan”.

I think that by doing that, he did more to underscore the issue than if he had spent 20 minutes giving us a play by play account of how we got here, and by those 2 omissions, he clearly tied the budget impasse to the Speaker.

The Governor is not going to abandon his attempt to drive down the cost of doing business in Illinois, nor should he. From the standpoint of one living in a district that gave him a 68%-32% mandate to do what he said he’d do, I don’t think the people of McHenry County want him to back down, either. Unfortunately, he ran up against the rocks of a 71 seat super-majority led by Speaker Madigan, and the budget was the only leverage he had to get his proposals enacted. Madigan is more interested in politics than governing, and he’s a master at it. Had he lost 1 seat in his caucus in 2014, it’s no stretch to say that we’d probably have a budget today. Without saying so, Bruce Rauner made that very point.

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Illinois Can’t Balance It’s Budget by Taxing Retirement Income

Back in December, the Northwest Herald ran a story about a proposal to make retirement income subject to Illinois income tax. On December 2, Rep. Dave McSweeney sponsored House Resolution 890, which states that:

“We state our belief that the Illinois Income Tax Act should not be amended to permit taxing retirement income.”

I wrote about this back in October after the first whiff of the proposal hit the Chicago Tribune. At that time I said that to tax retirement income is nothing more than piling more bad tax policy onto an already broken system.

But this post isn’t about a call for more and more revenue, it’s an attempt to make sense out of why the State’s budget is so out of balance.

There’s a simple, one-word answer: pensions. As I pointed out several days ago, in the next fiscal year, Illinois’ required pension contribution will amount to a full 24% of the state’s general revenue budget.

Actuarial SummaryThe chart to the left shows both the “Normal” and “Actuarially Determined” contributions to the state’s 5 public pension funds for fiscal year 2017. It does not include interest due on the unfunded amount. “Normal” cost (sometimes referred to as “current service cost”) is the annual cost assigned, under the actuarial funding method, to current and subsequent plan years. The ADC is the sum of both normal and past due required payments.

As you can see, over $5.9 billion of the state’s required contribution in 2016-2017 is due to chronic underfunding. This is why Illinois can’t pay its bills, this is what decades of corruption, log-rolling and political back-scratching have gotten us. To paraphrase our President’s pastor: “Illinois’ chickens have come home to roost.” And no one in this drama has clean hands.

If the State had fulfilled its funding obligation, there would be almost $6 billion more per year to fix our crumbling roads, create a first-class education system, and provide tax relief to an overburdened population. Instead, we’re looking at 30 more years of this, as the pension funds aren’t scheduled to hit 90% of full funding before 2045.

So no, I will not support any effort to tax retirement income. The answer to our budget mess lies not in adding more taxes onto a broken system.

Posted in Public Pensions, Uncategorized | Tagged , , | 1 Comment

Choosing Among Bad Options to Fix Our Pension Mess

Good Choice Bad ChoiceSo now we know that next year the State of Illinois will have to shell out 24% of its state budget just to pay pensions, and we strongly suspect that we’re having smoke blown at us if we believe the underfunding of the state’s 5 pension plans is “only” $111 billion.

What’s to do about it? Since states cannot file for bankruptcy, perhaps all we have left is an old saying attributed to “Reefs and Shoals” a handbook for cadets at the U.S. Naval Academy dating from the 1920’s that goes: “When in danger or in doubt, run in circles, scream and shout.”

But this is a serious issue, and deserves a serious response. For years, Illinois’ politicians have in effect borrowed money from the pension plans by not making required contributions or by overstating the expected rate of return on the portfolio so as to lower the amount of such contributions as have been made. While enactment of the Tier II pension system for new employees is supposed to stop the continued increase in pension accruals, the question remains: How do we pay off the $111 billion or $300 billion or whatever amount by which the funds are short?

In a 2010 article from the Chicago Tribune, economists Robert Novy-Marx and Joshua Rauh listed what few options the state has:

  • Taxpayers pay for it all in higher taxes and reduced public services. But it is hard to see us finding an extra $200 billion anytime soon. State and local government tax revenues in Illinois are around $55 billion annually, and budget shortfalls are colossal.
  • Continue to borrow to fund pensions. This tactic restructures the debt to employees so that it becomes debt to investors. Unfortunately, future generations of taxpayers would shoulder the burden. Illinois has already made $13 billion of pension bond issues, which are expensive as they enjoy no tax subsidies. The silver lining is that to keep borrowing, Illinois will soon need to credibly show capital markets a reform of its entire budgetary process.
  • Increase retirement ages for existing employees to 67 and eliminate openhanded early retirement deals. The Illinois Constitution states that public employee pension benefits may not be diminished or impaired. But if we are putting all options on the table, this one also has to be there, even if it involves changing the constitution.
  • We could do nothing and end up like Greece. If so, Illinois will eventually default on some of its $26 billion of outstanding general obligation and pension bond debt. The depletion of the state’s pension funds, which is quite likely within the next 10 years, will provide a catalyst. Illinois will then end up at the federal government’s doorstep, hat in hand. This should be avoided at all costs. Markets already are charging more for insurance on Illinois bonds than for bonds issued by Spain, Portugal or California.

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Is the Underfunding of Our Pensions 3 Times More Than Advertised?

Half Empty GlassAs I pointed out in the previous post, the required contributions to Illinois’ 5 pension funds will increase by $291 million in the next fiscal year, and will comprise fully 24% of the state’s general revenue outlays. That’s being done to satisfy the requirements of the Illinois pension law that requires all 5 funds to achieve a funding level of 90% by 2045.

That’s based on an assumption that the plans are underfunded by the $111 billion as stated in the November, 2015 report issued by the Commission on Government Forecasting and Accountability (COGFA). But what happens if the underfunding is 2 or 3 times greater than is reported?

Contributions for the past 3 years have increased dramatically from the previous years. From Doug Finke’s Springfield Journal-Register article:

“Dan Long, the commission’s executive director, said a reason is that the pension systems lowered their expected rates of return on investments last year, resulting in the state having to make a somewhat larger contribution. That lowered rates of return are now built into projections for state contributions.” (Emphasis mine)

I want to concentrate on Dan Long’s comment above about how lowered expected rates of return resulted in larger annual contributions. That’s going to require a bit of math.

Simply put, to achieve a particular return on an investment, the greater the investment return you demand, the less you’re willing to pay for it. Conversely, the lower the investment return you will accept, the more you have to pay for it. That’s because investors aren’t willing to pay a higher return-adjusted price for an investment than they could get if they put their money into a risk-free investment, which is generally defined as the rate on U.S. government securities. (Now, that wasn’t so bad, was it?)

According to the 2013 Illinois State Actuary’s Report:

“The interest rate assumption (also called the investment return or discount rate) is the most impactful assumption affecting the required State contribution amount. This assumption is used to value liabilities for funding purposes.”

This goes to the very heart of the discussion as to how underfunded Illinois’ pension funds truly are. According to the COGFA report, the plans are underfunded to the tune of $111 billion. That number is derived by using a lower assumed investment rate of return than had been used in previous years. This chart shows the reduction in investment returns for the 5 funds over the past several years:

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