future pressures

© 2011, Center for Tax and Budget Accountability

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CENTER FOR TAX AND BUDGET ACCOUNTABILITY

70 E. Lake Street Suite 1700 Chicago, Illinois 60601 direct: 312.332.1049 Email: [email protected]

Public Policy and Pensions: A Budgetary Analysis

For:Thursday, May 19, 2011; 3: 15 pm

Illinois Association of School Business Officials (IASBO0Pheasant Run Resort

4051 E. Main St., St. Charles, IL 60174

Presented by:Ron Baiman, Director of Budget and Policy Analysis


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Accrued Net Unfunded FundedSystem Liability Assets Liability Ratio

TRS $77,293.2 $31,323.8 $45,969.4 40.5%

SERS $29,309.5 $9,201.8 $20,107.6 31.4%

SURS $30,120.4 $12,121.5 $17,998.9 40.2%

JRS $1,819.4 $523.3 $1,296.2 28.8%

GARS $251.8 $54.7 $197.1 21.7%

TOTAL $138,794.3 $53,225.1 $85,569.2 38.3%

($ in Millions)FY 2010

Summary of Financial ConditionState Retirement Systems Combined

Assets at Market Value / Without Asset Smoothing

SOURCE: Commission on Government Forecasting and Accountability. The funded ratios for each of the five State retirement systems may be compared to the aggregate funded ratio of 38.3% for the five systems combined. Although the Judges' Retirement System and the General Assembly Retirement System have the poorest funded ratios, these two systems are much smaller and their unfunded liabilities are thus more manageable than the three larger systems.

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Source: CGFA, Financial Condition of the IL State Retirement Systems, Chart 1, p. 24


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$609.10 $712

$882 $1,128

$1,230$1,351

$1,473 $1,632

$9,182

$1,641$945

$1,389

$2,002

$2,832

$4,047

$0

$1,000

$2,000

$3,000

$4,000

$5,000

$6,000

$7,000

$8,000

$9,000

$10,000

$ in

mil

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ns

1996 1997 1998 1999 2000 2001 2002 2003 **2004 2005 2006 2007 2008 2009 ***2010

Years

State Contributions Annually since the 1995 Pension Ramp Passed

**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. 88-593Source: Commission on Government Forecasting & Accountability


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The "Ramp" before the 2008 Economic meltdown!Required Yearly Pension Payments:

FY 2006 - FY 2045

$0

$2,000

$4,000

$6,000

$8,000

$10,000

$12,000

$14,000

$16,000

$18,000

2006

2008

2010

2012

2014

2016

2018

2020

2022

2024

2026

2028

2030

2032

2034

2036

2038

2040

2042

2044

$ in

Mill

ion

s

TH

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Despite Recent Tax Increase, The FY 2012 Budget has an Operating Revenue Shortfall

of over $ 1 Billion

Bu

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pera

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ut a

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$ 1

Bil

lion

FIGURE 3 FY2012 Operating Deficit Walk Down

($ in Millions) Category Amount*

(i) Spending

General Fund Appropriations for Current Services

$25,931

Pension Payments** $4,829

Statutory Transfers Out *** $2,317

Pension Obligation Bonds $1,559

Capital Projects Debt Service $578

Total Proposed Expenditures

$35,214

(ii) Total Projected Revenue $33,930

(iii) Base Operating Deficit (-$1,284)

* All data from the FY2012 Budget Book, except pension payments.

** This pension contribution amount is from the March 10, 2011, update to the “Supplemental Digest to Retirement Systems’ Audits” issued by the State Auditor General.

*** Statutory Transfers Out include items such as the Local Government Distributive Fund, the Common School Fund, and the General Obligation Bond Retirement and Interest Fund.


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Lack o

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ue

Sti

ll a

n I

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GRF Deficit = $7 Billion

FY2012 Minimum Accumulated Deficit Walk Down ($ in Millions)

Category Amount Deficit as % of

Revenue

FY2012 Proposed Expenditures $35,214

Total Projected Revenue $33,930

Initial Operating Deficit (-$1,284) -3.8%

Carry-Forward Deficit from FY2011 (unpaid bills)

$6.05

TOTAL FY2012 REVENUE SHORTFALL (-$7,334) -21.6%


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Proposed options :• Borrowing from financial

institutions to pay overdue bills and cover operating costs

• Continued deferment of payments owed providers

• Further cutting FY2012 appropriations for services

• Raising Revenue:– Expanding sales tax to services.– taxing some retirement income– a progressive income tax.

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$260

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FY 2012 Proposed Nominal Dollar Change from FY 2011

Category FY2012 Proposed

FY2011 Revised (Feb 2011)4

Diff FY2012 Proposed –

FY2011 Revised

% Change FY2011 Enacted Approp

(July 2010) General Fund Excluding Pension $25,931 $24,313 $1,618 6.7% $24,940 PreK-12 Education $7,245 $7,020 $225 3.2% $6,997 Higher Education $2,149 $2,124 $25 1.2% $2,116 Health Care1 $7,749 $7,134 $615 8.6% $7,777 Human Services2 $4,917 $5,128 ($211) -4.1% $4,929 Public Safety3 $1,553 $1,391 $162 11.6% $1,403 Notes: 1) DPH and DHFS

2) Aging, DCFS and DHS 3) Corrections and State Police 4) FY2011 Revised Budget assumes that the Fiscal Stabilization Fund will be replenished and $505 M of interfund borrowing repaid in FY2011.

Source: FY2012 GOMB Proposed Budget Book (2/17/2011)


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Eve

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ajor

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very

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of R

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Category FY2012 Proposed

FY2000 Adj (ECI and Pop

Growth) 4

Diff FY2012-FY2000 Adj

(ECI and Pop Growth) 4

% Change

General Fund Excluding Pensions

$25,931 $30,829 ($4,898) -15.9%

PreK-12 Education $7,245 $7,443 ($198) -2.7%

Higher Education $2,149 $3,306 ($1,157) -35.0%

Health Care1 $7,749 $8,952 ($1,203) -13.4%

Human Services2 $4,917 $7,066 ($2,150) -30.4%

Public Safety3 $1,553 $2,075 ($522) -25.2%

Notes: 1) Department of Public Health and Healthcare and Family Services(Public Aid in 2000 and 2012)

2) Aging, Department of Children and Family Services and Department of Human Servcies

3) Corrections and State Police

4) Index value for FY2000 has been approximated by using 2001 and 2001 ECI. For Health Care Medical Care Midwest CPI (MCMWCPI) has been used.

Sources: COGFA Illinois State Budget FY2000, and GOMB Illinois State Budget FY2012.

FY 2012 Proposed Appropriations Compared to FY2000 Actual Appropriations Adjusted for Inflation and Population Growth

($ in Millions)


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Ch

an

ge in

Pro

posed

Gen

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even

ue F

un

d A

pp

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riati

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s

to H

um

an

Serv

ice A

gen

cie

s Three Agencies Provide Human Services:

Category FY2011 Enacted

FY2012 Proposed $ Change

% Change

Department of Aging $628 $798 $170 27.1%

Department of Child and Family Services $836 $843 $7 0.8%

Department of Human Services $3,663 $3,274 (-$389) (-10.6%)

Total Across Agencies $5,128 $4,917 (-$211) (-4.1%)

Data from GOMB FY2012 Operating Budget

One agency bears all the cuts:

DHS


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per

cap

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bu

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th in

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s fu

nd

ing Cuts in specific Department of Human

Services Programs

Category FY 2012

Proposed FY 2011 Enacted % Change $ Change

Circuit Breaker Pharmaceutical Credit $0 $24 -100.0% ($24) Addiction Treatment and Services $41 $97 -57.4% ($56) Child Care Services $285 $618 -53.9% ($333) Domestic Violence Shelters $9 $11 -19.2% ($2) Teen Parent Services $1 $3 -51.0% ($1) Mental Health Grants $112 $146 -23.0% ($33)

Total Across Programs $449 $899 -50.1% ($450)

Data Source: GOMB FY2012 Operating Budget.


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Section 5 of Article XIII of the Illinois Constitution states that Section 5 of Article XIII of the Illinois Constitution states that “membership in any pension or retirement system of the State, “membership in any pension or retirement system of the State, any unit of local government or school district, or any agency or any unit of local government or school district, or any agency or instrumentality thereof, shall be an enforceable contractual instrumentality thereof, shall be an enforceable contractual relationship, the benefits of which relationship, the benefits of which shall not be diminished or shall not be diminished or impairedimpaired.” (This clause is commonly referred to as the “pension .” (This clause is commonly referred to as the “pension protection clause.”) protection clause.”)

Source: Eric Madiar “Is Welching on Public Pension Promises an Option for Illinois?” An analysis of Article XIII, Section 5 of the Illinois Constitution.. March 2011.

IS WELCHING ON PUBLIC PENSION PROMISES AN OPTION FOR ILLINOIS?

“There is no moral exemption for any man or body of men that breakscontracts. Nor is there any hope of public or private respect for a

contract breaker. A contract breaker is an utter misfit as a citizen or abusiness man.”

—Franklin MacVeagh, former President of the CommercialClub of Chicago and U.S. Secretary of Treasury


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House Pension “Reform” Proposal

• Would offer three options:– Tier 1: increase employee

contributions for existing pension benefits, from current 8% -11.5% to 13% - 25% of salaries

– Tier 2: Reduced Pension Benefits

– Tier 3: 401K defined Contribution


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CTBA State Bond Holders “Reform” Proposal

• Would offer three options:– Tier 1: To maintain exiting

“benefits” (or debt service payments) for future use of your capital you will need to make payments to the state

– Tier 2: Accept Reduced “Benefits” or Debt Service Payments

– Tier 3: No more defined “benefits”. You will receive a fixed share of whatever payment the state, depending on market conditions, is able to make.


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Projected Revenue vs. Pension Payments

$0$10,000$20,000$30,000$40,000$50,000$60,000$70,000$80,000

2012

2015

2018

2021

2024

2027

2030

2033

2036

2039

2042

2045

Own Source Revenue

Required PensionContribution

SO

LV

ING

TH

E U

NF

UN

ED

PE

NS

ION

L

IAB

ILIT

Y

Rev

enu

e +

Pen

sion

s =

Su

stai

nab

leFiscal Year 2012 2020 2030 2040 2045

Own Source Revenue $29,088 $36,279 $47,818 $63,026 $72,358

Required Pension Contribution $4,912 $7,582 $11,251 $16,350 $18,946

Pension Share % of Own Source Revenue 16.9% 20.9% 23.5% 25.9% 26.2%


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69% of Revenue from Top 20% of Filers

Illinois Base Income Bracket

Average Base Income

Number of Filers % Deductions

Average Tax

Liability

Total Tax Revenue

($ millions)

%Total Tax

Revenue

Cummulative %Total

RevenueTax

IncidenceBottom 20% $0 - $7,000 $3,085 1,104,169 60.1% $46 $50.9 0.49% 0.49% 1.1%20% - 40% $7,000 - $19,000 $12,652 1,095,093 30.6% $242 $264.7 2.86% 3.35% 1.9%40% - 60% $19,000 - $40,000 $28,745 1,339,766 17.1% $671 $899.1 9.72% 13.07% 2.3%60% - 80% $40,000 - $75,000 $56,153 1,219,061 11.4% $1,376 $1,676.9 18.13% 31.20% 2.5%80% - 100% Over $75,000 $179,016 1,255,221 12.0% $5,068 $6,361.8 68.80% 100.00% 2.5%Total $72,328 6,013,310 25.2% $1,538 $9,247.4 100.00% 2.1%

Approximate Median 49.5% $30,000 17.2% $637 2.3%

Millionaires 99.5% $1,000,000 or More $1,000,000 28,999 55.3% $59,238 18.58% 1.3%

Source: CTBA calculations from Illinois Department of Revenue 2007 data


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Illinois Needs A More Progressive Tax System

• Of 41 states with an income tax, Illinois was tied for 4th lowest Individual tax rate on top income bracket.

• 2011 top rates in other states: CA 9.3%, NY 8.97%, MN 7.85%, IA 8.98%, NJ 8.97%, WI 7.75% .

• In 2007 the bottom 20% of households in Illinois paid 13.0% of their income in sales, property, and income taxes, the third highest share in the country and more than 3x the share paid by the top 1% (4.1%).


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For More Information:

Center for Tax and Budget Accountabilitywww.ctbaonline.org

Bukola Bello, M.A.Director of the Illinois retirement

security initiative (IRSI)(312) [email protected]

Ron Baiman, Ph.D.Director of Budget and Policy Analysis(312) [email protected]

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future pressures

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