CENTER FOR TAX AND BUDGET ACCOUNTABILITY
70 E. Lake Street Suite 1700 Chicago, Illinois 60601 direct: 312.332.1049 Email: rmartire@ctbaonline.org
The Illinois Funding Crisis
Prepared For:
Wednesday, August 26, 2009; 1:00 pm
Pension System Modernization Task Force
Presented by:
Ralph Martire
Executive Director
1
ILLINOIS’ ECONOMY
IS LARGE
The Context:
BIG ‘N RICH
• In 2008, Illinois ranked fifth
nationally with a Gross State
Product in excess of $633
billion (BEA).
• That would be the 27th largest
economy of any nation in the
world-greater than Egypt,
Saudi Arabia, Colombia,
Belgium, Sweden, Greece,
Ireland, Portugal, Norway
and Nigeria, to name a few.2
THE ILLINOIS
ECONOMY
Illinois GDP
Growth Lags
But, IL Gross State Product Grew Less than U.S. or Midwest
States, 1990-2007
71.7%
80.0%
49.4%
70.0%
48.1%
60.0%
50.0%
40.0%
30.0%
20.0%
10.0%
0.0%
US
Midwest States
Illinois
Source: Bureau of Economic Analysis, US Dept. of Commerce
3
ILLINOIS IS LOW TAX
OVERALL
Why the Economic Problems?
– NOT TAX BURDEN OR WASTEFUL SPENDING
• Illinois’ total state AND local tax burden, as a
percentage of personal income ranks only 41st in
the nation.
• The second lowest tax burden in the Midwest to
Missouri (Missouri is all of one-tenth of one
percent lower).
• Illinois also ranks only 45th in spending among
the states
4
The "Ramp" before the 2008 Economic meltdown!
Required Yearly Pension Payments:
FY 2006 - FY 2045
$18,000
$14,000
$12,000
$10,000
$8,000
$6,000
$4,000
$2,000
$0
5
20
06
20
08
20
10
20
12
20
14
20
16
20
18
20
20
20
22
20
24
20
26
20
28
20
30
20
32
20
34
20
36
20
38
20
40
20
42
20
44
$ in Billions
THE RAMP
$16,000
ELEMENTS OF A SOUND AND
FAIR FISCAL SYSTEM
WHAT SHOULD BE:
FAIR
PROGRESSIVE
RESPONSIVE
TO MODERN ECONOMY
STABLE
DURING POOR
ECONOMIES
EFFICIENT
DOESN’T DISTORT
PRIVATE MARKETS
BUT ISN’T
6
Illinois State Major Tax Revenues Have Not Kept Up With
Inflation by Over $7 Billion Since 2000
$500
2001
2002
2003
2004
2005
2006
2007
-$179.30
-$500
$ in Millions
NOT SO MUCH
$17
$0
-$576.40
-$1,000
-$1,274.10
-$1,369.20
-$1,500
-$2,000
-$2,500
-$1,873.03
-$1,953.03
Includes: Personal and Corporate Income, State Sales, and
Public Utility Taxes. Source, Illinois Commission on
Government Forecasting and Accountability. Inflation
based on Bureau of Labor Statistics, CPI.
7
WHICH CREATES:
(How Revenue Growth Will Not Keep Pace With The Cost of Current Services)
$49 Billion
Revenue
$44 Billion
Expenditures
$39 Billion
$34 Billion
$29 Billion
$24 Billion
26
20
25
20
24
20
23
20
22
20
21
20
20
20
19
20
18
20
17
20
16
20
15
20
14
20
13
20
12
20
11
20
10
20
09
20
08
20
07
20
06
20
STRUCUTURAL DEFICIT
The Illinois Structural Deficit
*Adjusts solely for historic rates of inflation and
population growth, and assumes normal economic
growth.
8
IS THE PROBLEM CONTRIBUTIONS OR
BENEFITS?
NEITHER – It is a Revenue not a Spending Problem.
Item
Amount
FY 2010 Appropriations
$ 26.085 B
FY 2000 Appropriations
$ 21.294 B
Nominal Dollar Increase
$ 4.791 B
Scheduled FY 2010 Pension Ramp increase over 2000 levels
-($ 3.422 B)
Nominal difference in Appropriations for Services in FY 2010 over
FY 2000, Net of Pension Increase
$ 1.369 B
9
Precentage Increases in Illinois General Fund Spending
(Net of Pension Ramp) versus Inflation
FY2000 - FY2009
50.0%
45.0%
40.0%
35.0%
30.0%
25.0%
45.1%
20.0%
15.0%
38.0%
39.5%
33.9%
32.6%
26.4%
23.8%
Com pund
MWCPI
Sim ple
MWCPI
10.0%
5.0%
0.0%
State
Spending
Increase
Com pound
ECI/Gov't
Sim ple
ECI/Gov't
Com pound
ECI/All
Sim ple
ECI/All
10
State Contributions Annually since the 1995 Pension Ramp Passed
$10,000
$9,182
$9,000
$8,000
$ in millions
$7,000
$6,000
$5,000
$4,047
$4,000
$2,832
$3,000
$2,002
$1,230
$2,000
$882
$712
$1,000
$1,473
$1,351
$1,128
$1,632
$1,641
$1,389
$945
$609.10
$0
1996
1997
1998
1999
2000
2001
2002
2003
**2004
2005
2006
2007
2008
2009
***2010
Years
**FY 2004 State appropriations authorized include $7.3 billion in proceeds from the sale of the pension obligation bonds.
***Scheduled future payment per P.A. 88-593
Source: Commission on Government Forecasting & Accountability
11
TWO PART SOLUTION:
Revise Revenue the Right Way
Re-think the Ramp
12
Income Growth in the United States 1979-1999
(Real 1999 Dollars)
*Source U.S. Census Data
Percent Change
INCOME INEQUALITY
Fair? Responsive?
100%
93.4%
80%
60%
50.20%
33.20
%
40%
20%
5%
0%
-20%
-6%
Bottom 60%
Next
20%
Top Top Top
20% 15% 1%
13
Fair? Responsive?
REGRESSIVE
State & Local Tax Burden as a
Percentage of Income
Income
Range
Average
Income
Tax Burden
Less than
$16,000
$16,000 –
$30,000
$30,000 –
$48,000
$48,000 –
$77,000
$77,000 –
$148,000
$148,000 –
$295,000
$295,000
or more
$8,900
$22,600
$38,500
$61,100
$101,400
$203,600
$1,322,100
12.7%
11%
10%
9.2%
7.7%
6.2%
4.6%
14
HOUSE BILL 174
INCOME TAX INCREASE
3%
3%
2/3
5%
2%
=
=
67%
5%
15
(SIC Indus try Standards)
70%
1996
1985
Services = 53%
60%
Services = 59%
1975
50%
1965
Services = 41%
Services = 36%
40%
P e rc e n t
Goods as a percent of GSP
Services as a percent of GSP
30%
1965
20%
Goods = 32%
1975
1985
Goods = 26%
Goods = 20%
10%
1996 Goods = 18%
0%
19
63
19
64
19
65
19
66
19
67
19
68
19
69
19
70
19
71
19
72
19
73
19
74
19
75
19
76
19
77
19
78
19
79
19
80
19
81
19
82
19
83
19
84
19
85
19
86
19
87
19
88
19
89
19
90
19
91
19
92
19
93
19
94
SALES TAX BASE
Revenues of Goods and Services as a Percent of Gross State Product: Illinois
1965 - 1995
Year
Center for Tax and Budget Accountability analysis of United States Bureau of Economic Analysis Data.
16
Revenues of Goods and Services as a Percent of Gross State Product: Illinois 1997-2007
(NAICS Industry Standards)
70%
60%
50%
2000
Services = 57.4%
2007
Services = 60%
1997
Services = 56%
Goods as a percent of GSP
30%
Services as a percent of GSP
P ercen t
40%
20%
10%
1997
Goods = 16%
2000
Goods = 15%
2007
Goods = 12.6%
0%
1997
1998
1999
2000
2001
2002
Year
Center for Tax and Budget Accountability analysis of United States Bureau of Economic Analy sis data.
2003
2004
2005
2006
2007
17
ATTACKING THE PROBLEM WITH A
SOLVING THE UNFUNED PENSION
RESPONSIBLE SOLUTION
LIABILITY
“Amortization” the Responsible Funding
Solution
Payment amounts assume an unfunded liability of
$73.4 billion and an interest rate of 8.0% over a 36
and 50 year period, respectively.
Illinois budget projections are based upon the
average annual historic CPI (consumer price index)
of 3.0% for a 15 year period of 1983-2008.
For purposes of these projections we assume that
the Illinois budget will keep pace with inflation,
18
increasing at an average rate of 3% per year.
Pension payment as percentage of overall IL budget
11.00%
9.63%
10.00%
$5,999.93 billion
9.00%
6.37%
8.00%
7.00%
6.00%
3.42%
2.33%
5.00%
4.00%
3.00%
2.00%
1.00%
Year
2059 payment amount, as % of IL budget
20
58
20
56
20
54
20
52
20
50
20
48
20
46
20
44
20
42
20
40
20
38
20
36
20
34
20
32
20
30
20
28
20
26
20
24
20
22
20
20
20
18
20
16
20
14
20
12
A
R
20
10
0.00%
YE
Percentage of overall budget used for pension payment
SOLVING THE UNFUNDED PENSION
SOLVING THE UNFUNED PENSION
LIABILITY
LIABILITY
2059 Payment as Percentage of Illinois Budget
19
Pension payment as percentage of overall IL budget
11.00%
10.36%
10.00%
$6,264.30 billion
7.48%
9.00%
8.00%
4.80%
7.00%
3.79%
6.00%
5.00%
4.00%
3.00%
2.00%
1.00%
Year
2045 payment amount, as % of IL budget
20
44
20
42
20
40
20
38
20
36
20
34
20
32
20
30
20
28
20
26
20
24
20
22
20
20
20
18
20
16
20
14
20
12
20
10
R
0.00%
YE
A
Percentage of overall budget used for pension payment
SOLVING THE UNFUNDED PENSION
SOLVING THE UNFUNED PENSION
LIABILITY
LIABILITY
2045 Payment as Percentage of Illinois Budget
20
2059 Payoff
$7,000
$6,000
$5,000
Payment Amount (Billions)
$4,000
$3,000
$2,000
$1,000
Years
Annual paym ent w 2059 payoff (billions)
Present Value of Annual Paym ent, 2059 Payoff, 2000 Chained Dollars
21
20
59
20
57
20
55
20
53
20
51
20
49
20
47
20
45
20
43
20
41
20
39
20
37
20
35
20
33
20
31
20
29
20
27
20
25
20
23
20
21
20
19
20
17
20
15
20
13
20
11
$0
20
09
SOLVING THE UNFUNDED PENSION
SOLVING THE UNFUNED PENSION
LIABILITY
LIABILITY
Annual Payment Compared to Present Value of Annual Payment,
20
09
20
10
20
11
20
12
20
13
20
14
20
15
20
16
20
17
20
18
20
19
20
20
20
21
20
22
20
23
20
24
20
25
20
26
20
27
20
28
20
29
20
30
20
31
20
32
20
33
20
34
20
35
20
36
20
37
20
38
20
39
20
40
20
41
20
42
20
43
20
44
20
45
Payment Amount (Billions)
SOLVING THE UNFUNDED PENSION
SOLVING THE UNFUNED PENSION
LIABILITY
LIABILITY
Annual Payment Compared to Present Value of Annual Payment,
2045 Payoff
$7,000
$6,000
$5,000
$4,000
$3,000
$2,000
$1,000
$0
Years
Annual paym ent w 2045 payoff (billions)
Present Value of Annual Paym ent, 2045 Payoff, 2000 Chained Dollars
22
ONE SIZE DOES NOT FIT ALL – WHEN IT
SOLVING THE UNFUNED PENSION
COMES TO PENSION REFORM!
LIABILITY
WHERE AON CONSULTING GOT IT RIGHT…
“If Plan Anticipated to be Insolvent in Short
Time”:
“Must Change Cash Flows in Short Time”
“New Tiers Won’t Help”
“Time is of the Essence”
“Cash infusion from other revenue sources”
**Due to lack of revenue the 5-state funded retirement systems are
in danger of becoming insolvent.**
Source: “Comparison of Public and Private Retirement Benefits” William B. Fornia of AON Consulting for the Pension Modernization Task
23
Force. August 12, 2009.
ONE SIZE DOES NOT FIT ALL – WHEN IT
SOLVING THE UNFUNED PENSION
COMES TO PENSION REFORM!
LIABILITY
WHERE AON CONSULTING GOT IT WRONG…
Benefit Cuts:
-current workers
-current recipients
Section 5 of Article XIII of the Illinois Constitution states that “membership in any
pension or retirement system of the State, any unit of local government or school
district, or any agency or instrumentality thereof, shall be an enforceable
contractual relationship, the benefits of which shall not be diminished or
impaired.” (This clause is commonly referred to as the “pension protection
clause.”)
Cash Infusion through Borrowing
Borrowing simply prolongs the inevitable tanking of the retirement systems and
takes an already debilitating debt from bad to worse. Identifying a revenue source
will permit the state to pay its pension obligations.
24
Source: “Comparison of Public and Private Retirement Benefits” William B. Fornia of AON Consulting for the Pension Modernization Task
Force. August 12, 2009.
Under P.A. 88-0593 (Funding Plan for State-Funded Retirement
Systems) , also known as the PENSION RAMP…
…Illinois would have to contribute $437.6 billion through 2045.
– Average of $12.2 billion a year – an already unattainable
amount proven by the growing unfunded liability.
– The “Pension Ramp” was supposed to address the state’s
unfunded liability.
• It FAILED due to the absence of a revenue stream to
support the ramp.
25
Under the Governor’s proposed Stair Step Funding Plan and
Two-Tier proposal…
…Illinois would contribute substantially more, $532.3 billion
through 2045.
-Average of $14.8 billion a year – which ironically costs more
than existing law!
- The Governor’s plan to underfund pensions will cost the state
an additional $94.7 billion between now and 2045.
(Source; Stair Step Funding Proposal, Governor’s Office, 5/8/2009)
The Commission on Government Forecasting and Accountability’s actuary
concluded that the Governor’s proposal to reduce benefits for new employees is
not appropriate for reducing costs.
(SOURCE: COGFA’s Fiscal Analysis of the Governor’s Pension Reform Proposal)
26
Further Information
For More Information:
Center for Tax and Budget Accountability
www.ctbaonline.org
Ralph M. Martire
Executive Director
(312) 332-1049
rmartire@ctbaonline.org
Bukola Bello
Director, Illinois Retirement Security Initiative
(IRSI)
(312) 332-1103
bbello@ctbaonline.org
27