Over at City Journal Steve Malanga has a pretty fair summary of how Illinois got into the mess it’s in with respect to public pensions:
Late last month, a Sangamon County circuit court judge overturned Illinois’s pension reforms, which the legislature passed in the waning days of 2013 in order to cut the state’s enormous retirement debt. Workers and retirees celebrated, but theirs is a Pyrrhic victory. Without the ability to fix a hugely indebted retirement system with more than $100 billion in unfunded liabilities, Illinois legislators and local officials will continue to rely on harsh fiscal remedies to balance their budgets. Government employees in the Prairie State can expect layoffs and stagnant wages for years. This is the price of victory when there’s no more money to go around.
If you read it in full, you will learn several things:
- Illinois now pays $1.2 billion a year more for present and retiree employee benefits than it does for present employee salaries. And rising fast.
- The problem is almost completely a creation of the Illinois legislature which has systematically expanded services in preference to paying its debts.
- It has become increasingly difficult for Illinois to satisfy its present commitments by borrowing, the preferred strategy.
There are several things that aren’t mention which might help you to understand the problem a little better. First, Illinois’s problems are not the fault of the Republicans. Democrats have controlled the governor’s mansion and the state legislature for roughly the last 15 years.
Second, Illinois has structural problems. Since Illinois is dead last when it comes to the state’s contribution to education, that means that districts are overwhelmingly responsible for paying the salaries of present teachers. However, since the state is primarily responsible for making the payments into the Teachers Retirement System, the fund from which retired teachers’ pensions are paid, districts have powerful incentives to negotiate contracts in which today’s wages are deferred in the form of future pensions.
Third, just about half of Illinois’s spending goes to pensions and Medicaid while another third goes to education, the balance to everything else. Clearly, Illinois can’t solve its problems by cutting everything else.
Fourth, the results of the bump in Illinois’s personal income tax a few years back demonstrate pretty clearly that Illinois has reached the segment of the tax rate-revenue curve in which increases in rate produce decreasing revenues. Illinois’s problems can’t be solved by increasing taxes.
There are things which might have been done by the federal government to ease Illinois’s pain and the pains of the other states including bringing healthcare costs down, controlling immigration, reducing federal taxation, and promoting economic growth. The federal government had other priorities.
Your statement above to the effect that the income tax increase beginning in 2011 demonstrated that increasing the tax rate reduces revenue is blatantly wrong. Revenue flowing into the state increased greatly as a result of the tax rate increase from 3% to 5%, and has remained higher in 2012, 2013 and 2014. Please check your facts before you make such idiotic statements.
Perhaps my phrasing was clumsy but it was not wrong. Revenue did not increase in proportion to the increase. We nearly doubled the personal income taxes but the revenues from the personal income tax did not double, rather increasing at a far lower rate which is what was meant. That suggests that future increases would need to be much higher to realize the necessary revenue. Since that is clearly political impossible raising taxes won’t solve Illinois’s problem.
Illinois’s problem can, ultimately, only solved by more robust growth. Unfortunately, we’re not headed in that direction.