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Don’t Worry, Illinois—Be Happy

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Don’t Worry, Illinois—Be Happy

Governor Jay Pritzker’s budget avoids all the hard fiscal choices that the state must make. February 26, 2019
Economy, finance, and budgets
Politics and law

When he was campaigning for the Illinois governor’s office, Democrat Jay Pritzker promised to confront the state’s many fiscal problems without cutting rich public-employee pension benefits or raising taxes on millions of residents. Now it’s clear how Pritzker planned to work this miracle. Last week, he released his first set of fiscal proposals for an “honest” budget, which relies on hundreds of millions of dollars of taxes that he’s not authorized to levy. The plan also resorts to a traditional Illinois budget maneuver—pushing pension payments further into the future, which will reduce the retirement system’s already-anemic funding status and raise the risk of insolvency. The governor’s long-term solution to the pension crisis, meantime, includes selling unidentified state assets to raise funds, a plan that one Chicago Tribune columnist described as “more smoke and mirrors.” Overall, it’s a budget that says to the average Illinois citizen: “Don’t worry, be happy. This won’t hurt a bit.”

Pritzker faces a $3.2 billion budget deficit, but he’s proposing little in the way of cuts to fill that hole. His biggest saving amounts to a fiscal maneuver to reduce the funding goal for the state pension plan from 100 percent to 90 percent and extends by seven more years the schedule for paying off the debt. Doing that will trim $878 million off next year’s pension payment. While 90 percent funding must sound reasonable to any Illinois resident (the system has only 40 percent of the money it needs right now), the lower goal is just a way of avoiding fiscal reality and, in the process, raising the risk that the system runs out of money.

The state can’t make any headway on its pension debt because nearly two-thirds of what it’s promising employees is supposed to come from investment returns on money that was never put away. Specifically, Illinois is missing about $135 billion, and that’s a whole lot of investment returns that the state isn’t getting when the market booms. The less money Illinois puts in now, the more investment revenue it forgoes, and the bigger the burden that falls on the taxpayer. There’s no evidence from around the country, where government retirement debt is piling up even in states that make their pension contributions in full, that Pritzker’s approach will end well.

Nevertheless, the governor refuses to amend the Illinois constitution so that the state can reduce the rate at which current government workers—whose unions heavily backed him—earn pension benefits. Changing the current system would slow down the accumulation of new pension obligations and channel the savings into paying off the debt. Without benefit cuts, the state will have to pay about $9 billion a year—nearly one-quarter of current revenues—to begin fixing the system. And it will need to make that kind of outlandish payment annually for about 30 years.

Even as he refuses to consider an amendment to trim pensions, Pritzker has proposed one to allow Illinois to institute a progressive income tax. That would let him tax the state’s wealthy residents more heavily to help finance the enormous bill for government pensions. Pritzker campaigned on instituting a progressive tax code to shore up the state’s fiscal condition without burdening middle-class residents, but this is more magical thinking. He points to neighboring states Wisconsin and Missouri, both with progressive income-tax regimes, as models for Illinois. But adopting those states’ tax schedules would mean a significant rise in middle-class taxes, and, without any budget cuts, Illinois could make headway only if it imposed stratospheric rates across the board.

Just how high those rates could go depends on how many wealthy residents leave the state and place an additional burden on those who stay. Illinois already ranks among states with the highest levels of outmigration, meaning that it’s losing more people to other states than it’s gaining. Even other Democratic governors, like New York’s Andrew Cuomo, are complaining about lower-taxed states luring away wealthy residents.

Meantime, Pritzker is relying on revenues from activities not yet legal. He’s hoping to raise $200 million from the sale of sports-betting licenses and $170 million from the sale of marijuana licenses and taxes on retail sales. But first the state must legalize both activities, then set up regulatory regimes and start accepting applications so that the money rolls in during the budget year that begins July 1. Even then, there’s little guarantee that the state will reap the anticipated windfall. Other states have found that getting the legal marijuana business off the ground isn’t easy. And selling licenses to plug a budget hole is a classic one-shot maneuver that leaves bigger deficits down the road.

That Pritzker won last November on a feel-no-pain platform is a troubling sign at a time when many states continue accumulating retirement debt. His predecessor, Republican Bruce Rauner, had a take-no-prisoners negotiating style that proved unproductive, but Rauner’s efforts to stabilize the state budget were also undermined by a state Supreme Court that overturned sensible pension modifications and a legislature that resisted other reforms. Pritzker’s election is a reminder that, faced with hard but necessary fiscal choices, some voters would still rather kick the can down the road.

Photo by Scott Olson/Getty Images

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