PI Original Ellyn Fortino Monday May 11th, 2015, 11:02pm

After Pension Ruling, Experts Say Illinois Lawmakers Should 'Face Up' To Need For New Revenue

After the Illinois Superme Court struck down the state's 2013 pension-cutting law on Friday, some economic and political experts say Springfield lawmakers and Gov. Bruce Rauner need to get serious about new revenue options to help address the state's pension and budgetary pressures.

Following Friday's Illinois Supreme Court ruling that overturned the state's 2013 pension overhaul, political, legal and economic experts are weighing in on what Springfield lawmakers and the new governor can do now to fix the state's pension crisis, with some saying additional revenue has to be part of the solution.

At $111 billion, Illinois has the worst public pension shortfall in the nation. The state's failure to pay its share of pension payments in the past is largely to blame for the ballooning debt.

The pension-cutting law -- approved by the legislature and signed by former Gov. Pat Quinn in December 2013 -- would have saved the state $145 billion over 30 years in part by reducing cost-of-living adjustments for retirees.

In its unanimous ruling, the Supreme Court firmly stated that the Illinois Constitution prohibits public employee pension benefits from being reduced.

"For anybody who's retired or who's already in the pension plan, this decision has said that the state has very little ability, if any, to tamper with it," said Allen Shoenberger, a professor at Loyola University Chicago's School of Law. "They could sweeten the plan. Of course that's possible, says the court, but if they do sweeten it ... that would then be the plan that's frozen in place for that person for the foreseeable future.

"There's very little that the state can do to deal with this, given that it's a problem that goes back many decades," he added.  "To solve it in a couple years is just not fiscally going to be possible."

John Jackson, visiting professor at the Paul Simon Public Policy Institute at Southern Illinois University, said the high court's decision, though not unexpected, definitely "creates a certain amount of chaos right now" for Springfield lawmakers.

The ruling came down just over three weeks before the scheduled end of the current legislative session and amid budget negotiations for the 2016 fiscal year, which begins July 1. Cash-strapped Illinois faces a more than $6 billion budget deficit in the upcoming fiscal year, and Republican Gov. Bruce Rauner has proposed deep cuts to address the shortfall.

"The budget is already in crisis, and the planning for managing that crisis appears to be pretty chaotic," Jackson said. "And this [Supreme Court decision] throws a huge hole in the budget that the governor submitted."

Rauner's proposed budget for the upcoming fiscal year assumes $2.2 billion in savings through new pension reforms that involve shifting certain public employees into the Tier 2 pension system with fewer benefits. The governor has yet to introduce his pension reforms as legislation to lawmakers. Even if they were to pass in the remainder of the legislative session, they would most certainly face a court challenge, experts explained.

During his budget address, Rauner said his pension proposal would "protect every dollar of benefits earned to date," and let current retirees receive everything they were promised. The governor further said workers hired before 2011 could "take a buyout option - a lump sum payment and a defined contribution plan in return for a voluntary reduction in cost-of-living adjustments."

As part of his pension reform agenda, Rauner has also stressed his support for a constitutional amendment that would allow for the reduction of future pension benefits. If such an amendment cleared the legislature, the earliest voters could take it up would be in 2016.

"The current governor's theory, as reflected in his State of the State address and talking points since then, is that we're not going to abrogate the contract from today backwards, but from tomorrow forwards we'll have new contracts, and that's a theory," said Christopher Mooney, director of the Institute of Government and Public Affairs at the University of Illinois. "They'll argue it in the Supreme Court. Maybe the Supreme Court will go along with it, but I really doubt it. The Supreme Court is not very sympathetic to anything other than the simple clear language that the constitution says."

Meanwhile, the clock is ticking down to the end of the legislature's regular spring session on May 31.

"I would imagine ... the pension (issue) will be one thing that gets put off. I just can't see how they can do it," Mooney said.

Jackson said lawmakers need to address the state's immediate budgetary issues -- including its projected pension payment of $7.6 billion that is due in the coming fiscal year -- and then focus on a workable long-term pension reform measure.

"That long-term management is bound to result in another Supreme Court case, and as we've already seen, that takes two more years," he said. "So let's take this in incremental steps: What they got to do is pay the bill [due next year for pensions], and in order to that, what they got to do is to face up to the need for new revenue."

Illinois is facing a tighter budget squeeze after the state's 2011 temporary income tax hike expired in January. The state income tax dropped in January from 5 percent to 3.75 percent for individuals and from 7 percent to 5.25 percent for corporations.

Jackson noted that the state was able to make its payments into the pension funds over the past four years thanks to the 2011 temporary income tax hike.

"The narrative has been built up ... that we didn't do anything positive in terms of gaining on the problem as a result of the 2011 flow of new money," Jackson said. "That is just not true. We did a lot of things. We paid the $7 billion pension payment, which they had consistently refused to pay up until then."

As for how current budget negotiations might shake out, Mooney said he expects the cuts will be "as large as probably we've ever seen in Illinois since Abraham Lincoln's time. They're probably going to end up with huge cuts and revenue increases, so everybody's going to hate it."

Ralph Martire, executive director at the Center for Tax and Budget Accountability (CTBA), agreed with Jackson that lawmakers need to get "more realistic" about revenue options.

"I think legislators need to grow up, and we need to have an honest discussion on revenue," he said. "It's the political system's refusal to deal with revenue and tax policy like adults that got us where we are today, so it created the unfunded liability in the pension system, which is a symptom of this revenue problem. It is not the cause of our fiscal problem."

CTBA has put forward a proposal to re-amortize the state's pension debt, an approach Martire says "is the only constitutional way to fund the pensions and fund the current services." Under the center's pension re-amortization model, the debt owed to the state's pension system would be paid off over 42 years with a level annual debt service payment of $7.4 billion, Martire said.

As part of the CTBA's re-amortization blueprint, the state would have to expand its sales tax base to include consumer services, tax some retirement income (keeping the full exclusion for people with adjusted gross incomes of $50,000 a year or less) and increase the personal income tax rate from the current 3.75 percent to between 4.5 percent and 4.75 percent. The only people who would see an income tax on all of their retirement income would be those with at least $150,000 a year in adjusted gross income, Martire said.

"It's not like it's impossible to find the revenue to do this. It's actually very possible, very pragmatic, very common sense," Martire said. "Without enhancing revenue, and doing those couple of revenue changes ... It's game over. You can't solve these problems. So let's be practical and do what we need to do."

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