State Budgets

Illinois Residents Do Not Trust Springfield to Manage Their Money

Caught up in all the excitement of Election Day, the residents of Illinois soundly rejected the progressive income tax amendment 55% to 45%. Despite Governor Pritzker spending $58 million of his own money to promote the amendment, the income tax was soundly rejected.

As Wirepoints’ Ted Dabrowski and John Klinger pointed out, it all comes down to trust. The people of Illinois do not trust lawmakers to handle more of their tax dollars.

You can’t blame them. Over a decade of ALEC research shows that Illinois has mismanaged tax dollars while increasing tax and debt burdens.

According to Rich States, Poor States, Illinois has one of the worst tax burdens in the country. On top of that, last year Governor Pritzker proposed state tax and fee increases totaling $6.9 billion. In response, Illinois residents have voted with their feet. On net, Illinois saw nearly 844,000 people leave the state over the past 10 years, more domestic out-migration than any other state aside from New York.

In the new Laffer-ALEC report, Grading America’s Governors, Governor Pritzker was ranked one of the worst governors in the nation. Under Governor Pritzker, Illinois finances have gone from bad to worse. Abysmal GDP and employment growth coupled with growing debt burdens leaves Illinois with a grim outlook for the future.

Illinois accumulated nearly $62 billion in bonded obligations, $64 billion in unfunded liabilities for other post-employment benefits (such as retiree health insurance), and nearly $360 billion in unfunded pension liabilities. In 2020, these debt totals have increased amid the economic shock of COVID-19.

Altogether, state debt totaled over $486 billion, over $38,000 per Illinois resident. This debt stemmed from the state failing to make the full annual required contributions (ARC) for pensions and other post-employment benefits and promising six-figure benefits to state employees. In addition, Illinois also regularly issued bonds to fund the public pension plan, increasing the outstanding bonded debt by billions of dollars.

Even with a $1.2 billion emergency loan from the Federal Reserve, Illinois still struggles to pay its bills.

The way forward for Illinois now is to cut spending. As Jonathan Williams and Dave Trabert pointed out in their recent op-ed in The Wall Street Journal, if the Land of Lincoln were to cut spending to match Texas, $2,585 per resident per year, it would save taxpayers $22.3 billion a year. Enacting a priority-based budget system will make sure spending is cut while Illinois can pay down its debts.

At the start of the process, legislators would make a systematic effort to determine what the state needs to do and how those priorities could be achieved. This budget system takes longer than automatically increasing spending, but it is worth it.

Making serious reforms to state pension systems can also help alleviate costs and improve pension solvency. The state attempted some modest pension reforms in 2015 that adjusted cost of living increases, but these reforms were struck down by the Illinois State Supreme Court after finding that such reforms went against the Illinois State Constitution amendment protecting pensions.

Now is the time for Illinois to revisit public pension reform. First, this may require an amendment to the state constitution that allows for pension reforms that improve solvency, a major undertaking in and of itself. Such reforms could include enrolling new hires in a 401(k) plan and enacting cost and risk sharing reforms similar to what the Wisconsin legislature and then-Governor Scott Walker enacted in 2011.

One of the most important reforms enacted in Wisconsin requires all public employees to contribute half of all ARC payments for their pension plans. By requiring participants and the state to split the ARC payment every year, prudent investment practices are incentivized to minimize financial risks and annual costs.

For now, Illinois learned an important lesson in tax policy the hard way: tax increases are especially unpopular when taxpayers do not trust the government to use their money responsibly.

 


In Depth: State Budgets

Smart budgeting is vital to a state’s financial health. The ALEC State Budget Reform Toolkit offers more than 20 policy ideas for addressing today’s shortfalls in a forthright manner, without resorting to budget gimmicks or damaging tax increases. One way to stabilize budgets over time is to embrace …

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