by Ralf Seiffe
There’s a lot of talk about increasing income taxes in Springfield. Democrats, and even rubbery Republicans, confess they have no other idea on how to fix the giant hole in Illinois’ fiscal situation. What appears to be missing is any nexus between the cause of the problem and the possible solutions. Until that connection is made, any tax increase will simply increase state spending without remedying the causes of the problem. Smart Republicans and Democrats who can spell “Michigan” should insist the General Assembly make that connection before voting for any tax increases.
The Pew Center for the States has investigated some 400 pension and healthcare funds operated by the states and found these plans had actuarial underfunding to be at least $1 Trillion. Their report is here. Of the financial disasters exposed by this report, Illinois has the dubious distinction of being one of the worst with only about half its pension fund promises actuarially funded. Indeed, of the total debt Illinois faces, pension underfunding explains 91% of it, according to a chart based on data from state’s Commission on Government Forecasting and Accountability. All tolled, the state’s obligations will reach $130 billion by this year’s fiscal year end, according to www.illinoisisbroke.com.
There’s a difference between short-term budget shortfalls and long-term structural imbalances. Considering only the long-term, it seems to me that the problem Illinois faces are its pension obligations. Even our leaders seem to have come to the same remarkable command of the obvious; our stern-faced governor has proposed that we stop accruing lavish pensions for new state and municipal employees who enjoy much higher career earnings, have near-certain job security and retire much earlier than the taxpayers who fund these benefits. The governor makes this bold and timely proposal secure in the knowledge that his pension(s) are safe from reduction.
He’s also proposed that we increase taxes by 66% to pay for these obligations and for other spending priorities. He justifies this proposal on the Democrat mantra of “shared sacrifice” spiced by the notion that “ability to pay” is the way to apportion the new levies. To meet this objective, he’s proposed very large personal and family deductions that create at least two tiers of taxation. So, despite the Illinois Constitution’s prohibition against progressive income taxes, the governor’s appears to have found a novel way to achieve one of the great aims of all socialist philosophers.
As he is the governor, one must assume this is a constitutional approach, vetted by the phalanx of lawyers at his command. What it fails to accomplish, however, is either linkage to the problem of out-of-control pensions or to accurately assess those with the ability to pay. It also fails to take responsibility for the root causes of the problem.
Starting with the root causes, Illinois taxpayers have every right to be miffed at the management of state and municipal workers’ compensation packages. Our leaders have not resisted their workers’ demands in the fiduciary fashion that the concept of honest services demands. They allowed the formation of public sector unions and then colluded to raise compensation and benefits well beyond those available to taxpayers. Without the countervailing force of the profit motive that exists in the private sector, our leaders have treated themselves and their workers to salaries and benefits that have literally bankrupted Illinois. Now, they expect Illinois taxpayers to pay for their conspiracy with massively higher taxes. This is immoral, it should be illegal and there should be some penalty for letting it happen.
One of the ways the governor and the general assembly have been able to skirt the state constitution’s requirement that it only spend funds available is through accounting gimmicks that are felonious in the private sector. The most evident is the failure to report or consider the current service costs of pensions. Each year, state workers earn a fractional part of their eventual pension. Truthful accounting demands that the amount earned be charged to this year’s operations and accumulated through the career of the employee. Then, when the worker retires, funds will be available to pay the promised benefits. These costs are simply ignored by the general assembly which spends the dollars that should have been reserved on current projects. Were it not for the state’s sovereignty, this practice would be indictable.
So, as one great socialist philosopher once said “What’s to be done” about pensions? Why not adopt the governor’s theories on taxation and link the solution to the problem? First, let’s consider the notion of “ability to pay”. If that’s a legitimate basis for taxation, why not recognize that the lavish pensions the governor and other state workers receive are so much better than the average private sector pension that they literally define the ability to pay. So, using the governor’s logic, why not create a pension tax for public sector pensions? Then, connect that with the average pension in the private sector and make that average the “personal pension tax deduction”. In that way, only the excess benefits--that portion that collusion produced--would be taxable.
The future pension obligations would be directly reduced by the rate of taxation imposed by the public sector pension tax. The higher the tax, the greater the reduction in future pension obligations. And there’s no reason to not to tax the plan heavily because turnabout is fair play. Whenever the politicians talk about “taxing the rich”, there is always a subtle undercurrent that the rich got their wealth in some underhanded way and have some duty to pay it back. In the case of public pensions, there is actual collusion between the parties designed to hurt a third party, in this case the taxpayers. Under these circumstances, the opprobrium politicians have for the rich—and for taxing them--should be liberally turned towards a public sector pension tax in the form of a very high rate.
Given the sneaky way the governor has sidestepped the prohibition on progressive income taxes, a public sector pension tax would be an analogously clever way to comply with the constitutional pension guarantees yet solve the problem. The benefits would be paid, fulfilling the contract and extinguishing any constitutional attack. Then, in a method unrelated to the benefits, a tax would justifiably tax excess benefits.
Finally, the accounting mess. One is reminded of the folks who worked for Enron and invested their 401(k) money in Enron stock. Then, they proceeded to swindle the stock price up from its fundamentally worthless value to a huge number. All along, the workers thought they were getting rich, based on the rising price of their Enron shares. Eventually, the market detected the lie that was Enron and marked the shares down to pennies. The workers felt they were damaged because they “lost” all their gains. But, these were ill-gotten gains based on lies about the company’s financial condition which were passed off on the public. Their gain was illusory.
Similarly, public pension benefits at the state and local level have been based on a lie of the same character as in the Enron situation. The state did not accurately report its true financial condition and the benefits were created only because of this falsity in accounting. Public sector employees knew, or should have known, that the prolific benefits they anticipate are based on this lie and were also illusory. If the system explodes, they will not have lost any real value because, just like the Enron employees, there was no real truth in the plans, there was only the state’s empty promise. Public sector workers had and have a duty to complain and complain loudly when the general assembly created the pension fiction. That they did not makes them just as complicit as our leaders—or the Enron employees—when these plans come apart.
Readers might consider this a rant, and in some ways it is. The facts, as I see them are these: the politicians swindled the public and the rank and file state workers to make themselves more electable. That they take no responsibility now, and tell us that the private sector must now make up for their deceit is not only maddening, it’s unfair. It demands some penalty and taxing their excessive pensions is just one thought.
