Civic Federation calls for tax hikes, opposes sensible reform in budget criticism

The Civic Federation’s criticism of Gov. Bruce Rauner’s proposed budget is a mixed bag, with its own proposals for Illinois’ financial crisis – including nearly $3 billion in tax hikes – missing the mark.

The Civic Federation, a Chicago-based public policy research organization, recently criticized Gov. Bruce Rauner’s proposed fiscal year 2019 budget, calling it “precariously balanced” and disagreeing with some of the governor’s proposals for reining in the cost of state government.

While the Civic Federation offers valid points that the state needs a better plan to address its bill backlog and that it can’t count on a sale of the Thompson Center for revenue, the organization’s proposed taxation of retirement income and extension of the sales tax to services would harm Illinois’ economy and taxpayers.

The Civic Federation took issue with certain aspects of the governor’s budget plan, specifically:

• A plan to save $825 million by properly aligning local pension and retiree health insurance costs for teachers and university employees
• Relying on rightsizing state employee health care benefits to put them in line with the private sector, for $470 million in savings
• Reducing state subsidies to Illinois’ nearly 7,000 units of local government, for $80 million in savings
• Failure to adequately address the unpaid bill backlog
• Counting on $240 million in revenue from the sale of the James R. Thompson Center

With the exceptions of counting on revenue from the sale of the Thompson Center and not doing enough to pay down the bill backlog, the Civic Federation’s criticisms are wrong-headed. Furthermore, the Civic Federation’s own proposed budget relies on a number of painful tax increases that Illinoisans should not tolerate.

Ultimately, the governor’s proposed budget is balanced, as the Civic Federation admits. In a state that has not had a balanced budget since 2001, even “precariously balanced” is a step up. Fortunately, taxpayers don’t need to settle. While Rauner’s budget includes some good ideas, a better path forward for Illinois is to demand lawmakers adopt a voluntary spending cap.

The following is an overview of what the Civic Federation gets wrong about Rauner’s budget, what it gets right, and why continuing to hike taxes on tapped out Illinoisans isn’t a fair solution to the state’s fiscal problems.

“Cost shift” is really about placing responsibility for costs with those who determine them

The largest single savings proposal in the governor’s budget is what opponents derisively refer to as a pension “cost shift.” In truth, this proposal is about properly aligning incentives when it comes to local pensions and is based on a simple principle: A bill should be paid by the one who incurs the cost.

Currently, although local school districts and universities set compensation for employees, the state of Illinois pays the “normal cost” of pensions for the Teachers’ Retirement System, or TRS, and State Universities Retirement System, or SURS. Normal costs are the employer portion of the pension bill incurred by a new year of pension benefit accruals, not including previous unfunded liabilities.

The status quo is an example of a classic economics problem often referred to as “concentrated benefits and dispersed costs.” Local elected officials can make spending decisions on salaries and pension-boosting perks with little regard for the total cost, which is passed on to the state. It’s a win-win for local officials and public employees.

Who loses? Taxpayers. This higher pension bill translates to higher taxes and crowding out spending on essential services.

The Illinois Policy Institute has proposed eliminating this distortionary subsidy in the past. The governor’s budget proposes phasing out the subsidy over four years. Savings for the first year would total $825 million, broken down as follows:

• $262 million by transferring 25 percent of the TRS normal costs
• $101 million by transferring 25 percent of the SURS normal costs
• $228 million by returning to the practice of the Chicago Teachers’ Pension Fund, or CTPF, paying its full normal cost
• $129 million by ending lifetime health insurance support for retired teachers
• $105 million by transferring some university group health insurance costs back to state universities

Fiscal year 2018 was the first year the state paid for the normal cost of the CTPF, which has paid its own costs since 1995. While the Civic Federation states that it is in favor of the “cost shift” idea in general, it objects to Rauner’s proposal out of a particular concern for Chicago, at the expense of the rest of the state.

Realignment of pension costs is a commonsense proposal to control the growth in pension benefits and reduce pressure on the state budget, which has repeatedly led to tax hikes. Combined with policies to reduce property taxes, properly aligning public retiree costs will protect taxpayers and help put Illinois back on a path towards fiscal solvency.

Rightsizing AFSCME health insurance costs

The Civic Federation criticized the inclusion of this health care savings proposal because they believe the savings are unlikely to pass through the General Assembly. But taxpayers deserve advocates for good policy proposals, as well as allies in the fight to push them through the General Assembly.

State workers receive platinum-level health insurance at bronze level prices. Illinois taxpayers currently pay 77 percent of the cost of state employee health insurance. The $18,031 per employee annual cost is $4,606 more than the average per employee health insurance cost in the private sector, according to the Governor’s Office of Management and Budget, or GOMB.

Since the expiration of the last contract for the American Federation of State, County and Municipal Employees, or AFSCME, the governor has been proposing to increase state worker contributions to their health insurance plans to 40 percent, up from just 23 percent.

While it is true that these efforts have so far been blocked by union-driven litigation, the governor has asked that lawmakers change a state law that requires the benefits to be collectively bargained, according to the Chicago Tribune.

It may well be true that Democratic leaders in the General Assembly would be unwilling to adopt this proposal, preferring to protect the inflated benefits of AFSCME workers. This is not, however, a reason to oppose the solution on policy grounds. Instead of trying to predict what lawmakers will accept, the conversation should be about what taxpayers deserve and how advocates can convince lawmakers to do the right thing.

Eliminating subsidies for excessive numbers of local governments

The Civic Federation opposes this idea on the grounds that the state should be a partner with local governments and help them bear financial burdens. Unfortunately, the financial burden of state subsidies for local governments ultimately falls on taxpayers’ shoulders.

Illinois has nearly 7,000 units of local government, which is over 4.5 times as many as California on a per capita basis. Illinois also has some of the highest property taxes in the nation, according to a recent report from ATTOM Data Solutions, and the excessive number of local governments is a significant contributor.

Illinois state government enables and subsidizes this overabundance of local government through income tax sharing subsidies known as Local Government Distributive Fund, or LGDF, disbursements.

The governor’s budget for fiscal year 2019 proposed a more modest 10 percent “cut” in LGDF – meaning 10 percent less than local governments would expect if spending was on autopilot – for $80 million in savings.

Unfortunately, a recent change has made public transparency around LGDF even worse. As part of the fiscal year 2018 budget, the General Assembly hid this subsidy from the budgeting process. Instead of being counted as an expenditure, LGDF income tax sharing is now automatically sent out.

That’s why the Civic Federation misleadingly refers to the governor’s proposal as “additional revenue.”

In truth, ending or reducing LGDF subsidies is a taxpayer-friendly solution if combined with policies to reduce property taxes and give local governments more control of their spending –such as collective bargaining reform, reducing unfunded mandates and increasing opportunities for local government consolidation.

Civic Federation’s valid criticisms are overshadowed by tax hike proposals

The Civic Federation is right that the governor should not count on $240 million in revenue from the sale of the Thompson Center. The governor included this idea in his fiscal year 2017 and 2018 proposed budgets, but the sale never happened due to legislative resistance.

The Civic Federation is also correct in criticizing the proposed budget for its lack of a long-term plan to pay down the backlog of bills. GOMB predicts the bill backlog will stand at $7.7 billion at the end of this fiscal year.

Unfortunately, the Civic Federation’s proposed solutions for fiscal year 2019 are even worse. The group’s plan relies on nearly $3 billion in new tax hikes, including $2.5 billion more from taxing retirement income and hundreds of millions from expanding the sales tax to include services.

Generally speaking, good tax policy should have low rates and a broad base, meaning few exemptions. But in Illinois, every tax hike should be viewed suspiciously. Illinois already has one of the highest taxpayer burdens in the nation when combining state and local taxes. A 2016 survey from the Paul Simon Public Policy Institute found that nearly half of Illinois residents polled wanted to leave the state, and taxes were the No. 1 reason.

In an overtaxed state, tax hikes also hurt jobs growth and the overall economy. The 2011 temporary income tax hikes cost the Illinois economy $55.8 billion in real GDP from 2012 through 2016 and the 2017 permanent income tax hike is likely to be similarly damaging.

If the Civic Federation wants to simplify the tax code or remove exemptions, it should look to do so only in a way that is revenue neutral or provides tax relief to Illinoisans.

Instead of trying to take more money from taxpayers, Illinois lawmakers should voluntarily adopt a spending cap for the fiscal year 2019 budget. To their credit, the Civic Federation did include a version of a spending cap in their own proposal, though it is limited in not applying to spending outside of executive agencies. A meaningful spending cap should apply to all general funds spending.

A voluntary spending cap would give lawmakers roughly $36.9 billion to spend this year, about $753 million less than expected revenues. That surplus could be used to more than double the governor’s proposed payment to the bill backlog. In the long term, a spending cap combined with structural reforms to the cost drivers of the Illinois budget – such as pensions and health care – would allow lawmakers to pay down the bill backlog, set money aside in a rainy day fund, and provide tax relief to Illinois residents