a rational approach to fiscal policy and pension funding · 2016. 5. 26. · a rational approach to...

Presented by:Ralph M. Martire, Executive Director

70 East Lake Street

Suite 1700

Chicago, IL 60601

www.ctbaonline.org

© 2016, Center for Tax and Budget Accountability

A Rational Approach to Fiscal Policy and Pension Funding

May 25, 2016

Harper College Annuitants Association

Wojcik Conference Center

1200 West Algonquin Road

Palatine, IL 60067

State and Pension Funding Issues Cannot be Resolved in a Vacuum

May 25, 2016

2


Pension funding has to be resolved in context of fiscal policy and the politics that go along with that.

The Illinois General Fund

May 25, 2016

3


Two Primary Elements:

(i) Hard Costs—No DiscretionApprox. %

of Total

Debt Service 26%

Pension Contributions 56%

Statutory Transfers Out 18%

(ii)Current Service Expenditures—Discretion Varies

(Approx. $24 B)

Education (PreK, K-12, Higher-Ed) 35%

Healthcare 30%

Human Services 21%

Public Safety 5%

91%

+Group Health 5%

+Everything Else 4%

100%

FY2015 ≈ $35 B Overall

≈ $11 B

≈ $24 B

May 25, 2016

4

Which means pension funding competes with those four core services areas for the same tax $’s


$

$

$

$

Year-to-Year Changes Under Governor’s FY2016 Proposal

May 25, 2016

5

Category FY2015FY2016

ProposalNominal

Difference Nominal

Difference (%)

K-12 Education $6,254 $6,221 ($33) -0.5%

Early Education $300 $319 $19 6.2%

Higher Education $1,946 $1,593 ($354) -18.2%

Human Services $5,136 $4,743 ($393) -7.7%

Healthcare $7,303 $6,431 ($871) -11.9%

Public Safety $1,704 $1,799 $94 5.5%

Group Health $1,565 $1,195 ($370) -23.6%

Other $1,239 $1,091 ($148) -11.9%

Governor Discretionary $90 $0 N/A N/A

Gross Appropriations $25,539 $23,392 ($2,147) -8.4%

Less Unspent Appropriations

($950) ($653)

Net Appropriations $24,589 $22,738 ($1,850) -7.5%


Sources: FY2016 from GOMB’s “Operating Budget Detail,” February 2015; HB 317 of the 99th General Assembly;

COGFA, FY2015 Budget Summary (Springfield, IL: August 1, 2014); and, GOMB, Illinois State Budget: Fiscal Year

2016 (Springfield, IL: February 18, 2015), CH. 3-6.

Comparison of Democrats’ Proposed 2016 Budget vs. Governor’s 2016 Budget

May 25, 2016

6


CategoryFY2016

Governor

FY2016

Democrats$ Difference % Difference

Healthcare (including Medicaid) $6,431 $7,317 ($885) -12.1%

Early Childhood Education $319 $319 $0 0%

K-12 Education $6,221 $6,221 $0 0%

Higher Education $1,593 $1,899 ($307) -16.2%

Human Services $4,743 $5,193* ($453) -8.7%

Public Safety $1,799 $1,795 $4 0.2%

Group Health $1,195 $1,195 $0 0.0%

Other $1,091 $1,154 ($62) -5.4%

Total Spending (Gross) $23,392 $25,093 ($1,701) -6.8%

Source: GOMB’s “Operating Budget Detail,” February 2015, Excel file; House Bill 3763, 4151, 4153, 4154, 4146-4148, 4158-4160, and 4165;

and, Senate Bills 2029-2037 of the 99th General Assembly.

*Human Services includes $446 million appropriation from the Commitment to Human Services Fund for the Democrats’ plan.

FY2016 Governor’s Proposed General Fund Deficit Walk-Down ($ Billions)

May 25, 2016

7


Step Revenue $ Billions Spending$

Billions

Remaining Revenue

(Revenue –Spending)

(i) FY2016 Revenue $31.65 FY2016 Hard Costs $11.37 $20.28

(ii) Revenue After Hard Costs $20.28

Estimated Accumulated Deficit Carry Forward from FY2015

$5.94 $14.34

(iii)

Projected Net FY2016General Fund Revenue Available for Services

$14.34Projected Net General Fund Service Appropriations

$22.74 ($8.40)

(iv) ($8.40)Backlog of Group Health

$0.77 ($9.17)

Projected Accumulated FY2016 General Fund Deficit

($9.17)

Projected Deficit as a Percentage of General Fund

Service Appropriations-40.3%

FY2016 Democrats’ Proposed General Fund Deficit Walk-Down ($ Billions)

May 25, 2016

8


Step Revenue $ Billions Spending $ Billions

Remaining Revenue

(Revenue –Spending)

(i) FY2016 Revenue $32.14 FY2016 Hard Costs $11.37 $20.77

(ii) Revenue After Hard Costs $20.77Estimated Accumulated Deficit Carry Forward from FY2015

$5.94 $14.83

(iii)Projected Net FY2016 General Fund Revenue Available for Services

$14.83Projected Net General Fund Service Appropriations

$24.00 ($9.17)

(iv) ($9.17)Backlog of Group Health

$0.77 ($9.94)

Projected Accumulated FY2016 General Fund Deficit

($9.94)

Projected Deficit as a Percentage of General Fund

Service Appropriations-41.4%

Going Forward: Illinois Still Has a Structural Deficit

May 25, 2016© 2016, Center for Tax and Budget Accountability

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$30,000

$35,000

$40,000

$45,000

$50,000

$55,000

20

15

20

16

20

17

20

18

20

19

20

20

20

21

20

22

20

23

20

24

20

25

$ M

illio

ns

Fiscal Year

Revenue (Current Law) Appropriations (just adjusting for inflation)

That Structural Deficit has Existed for Decades . . .

May 25, 2016

10

Which in turn has incentivized electeds in both

parties to borrow against the

pension systems to fund services.


What About Pension Benefits? Not the Problem

May 25, 2016

11


-$1

$8 $9

$16 $17

$45

-$10

$0

$10

$20

$30

$40

$50

Salary Increases Benefit Increases Changes inAssumptions

Other Factors Investment Losses Borrowing fromContributions

$ B

illi

on

s

Change in Unfunded Liabilities 1995-2013 48%

7%

Paying this Ramp is Fiscally and Politically UnattainableHard Costs (Appropriations/Budgeted Figures)

May 25, 2016

12


$0.0 $0.5 $0.4 $0.4 $0.5 $0.5$1.2

$1.8 $2.2 $2.1 $2.3 $2.2 $2.2$2.1$2.1 $2.5 $2.5 $2.7 $2.7

$2.0

$2.6$3.1 $3.0 $2.9

$2.4$3.1

$1.4$1.2 $0.7 $1.0

$1.2

$1.6$0.0

$4.2

$4.1$5.1

$6.1$6.2

$6.8

0

2

4

6

8

10

12

14

$3.57 $3.79 $3.61 $3.88 $4.43 $4.79 $3.24 $8.58 $9.38 $10.19 $11.31 $10.76 $12.03

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Debt Service (Pension & Capital Bonds) Statutory Transfers Out PensionNotes: Legislation passed in 2005 cut the state’s pension contributions for fiscal years 2006 and 2007 In 2010 the state used Pension Obligation Bonds to pay its pension contribution In 2011, the state also used Pension Obligation Bonds. AS such, while the state budgeted for $4.2 billion in General Fund pension contributions the actual General Fund pension contribution in

2011 was $0 2015 statutory transfer is artificially low because it exclude $600 million Healthcare Provider Relief Fund transfer, which took place in 2014 instead (that $600 million IS NOT reflected in the 2014

figure) 2016 statutory transfer does NOT reflect the $650 million repayment of inter-fund borrowing that will take place in 2015

And Changing to Defined Contribution = NO GO Better (Fiscally) to Fight Than Switch (to DC)

May 25, 2016

13

West Virginia

Moved all new teacher hires to DC in 1991

Caused funded ratio to drop to 25%

In 2003, found its DB was 1/2 the cost of its DC

In 2008, allowed teachers to switch to DB

This SAVED the state $

Funded ratio now up to 58%


Compared to the Rest of the Nation, Illinois is a Very Low Spending and Small Government State

14

Consider that:

In calendar year 2013, Illinois had the fifth largest population (Census Data), fifth highest overall state Gross Domestic Product (GDP) (BEA Data), and 12th highest state GDP per capita in the nation.

Despite that Illinois ranked 28th in General Fund spending on services per capita, and 36th in General Fund spending on services as a share of GDP.

Illinois also ranked 49th, next to last among all 50 states, in number of state workers per 1,000 residents.


*Data for preceding analysis comes from U.S. Census, U.S. Bureau of Economic Analysis, National Association of State Budget Officers, and the final, enacted General Fund Budgets of all 50 states.

May 25, 2016

Spending Cuts Are Not the Answer

May 25, 2016

15


$22

$23

$24

$25

$26

$27

$28

2009 2010 2011 2012 2013 2014 2015

$ B

illio

ns

Fiscal Year

Change in Net General Fund Budgeted Appropriations for Current Services During Recovery—Post Great Recession(Nominal, non inflation-adjusted dollars)

Change in Net General Fund Budgeted Appropriations

FY2015 General Fund AppropriationsRelative to FY2000, in Nominal Dollars and

Adjusted for Inflation and Population Growth (excluding Group Health)


Sources: House Bills 6093, 6094, 6095, 6096, and 6097 of the 98th General Assembly for FY2015 appropriations. Appropriations for FY2000 from Illinois Economic

and Fiscal Commission, FY2002 Budget Summary (Springfield, IL: September 2001) and Illinois Economic and Fiscal Commission, Fiscal Year 2001 Report on the

Liabilities of the State Employees' Group Insurance Program (Springfield, IL: March 2000), 2. FY2000 appropriations adjusted using ECI, Midwest Medical Care CPI

(for Healthcare), Midwest CPI from the BLS as of July 2014, and historic year-to-year population growth from the Census Bureau as of Jan. 2014.

19.1%

-23.7%

-28.0%

-40%

-30%

-20%

-10%

0%

10%

20%

30%

State Spending Change (Nominal) State Spending Change (CPI and Population Growth) State Spending Change (ECI and Population Growth)

16

May 25, 2016

FY2015 General Fund Service Appropriations Relative to FY2000, in Nominal Dollars and Adjusted for Inflation and Population Growth (excluding Group Health)


CategoryFY2000

(Nominal)

FY2015(including supplemental

appropriations)

FY2000

(Adj. for

Inflation and

Pop)

$

Difference

%

Difference

Healthcare (including

Medicaid)$5.04 $7.30 $9.45 ($2.15) -22.7%

PreK-12 Education*

(General Fund Only)$4.84 $6.55 $7.59 ($1.04) -13.7%

Higher Education $2.15 $1.95 $3.37 ($1.42) -42.2%

Human Services $4.66 $5.14 $7.30 ($2.17) -29.6%

Public Safety $1.39 $1.70 $2.17 ($0.47) -21.7%

Other $1.64 $1.24 $2.56 ($1.32) -51.7%

Total Spending

(Gross)$19.72 $23.88 $32.45 ($8.57) -26.4%

• FY2015 appropriation for K-12 Education excludes $200 million from the Fund for Advancement of Education that is appropriated for General State Aid. The

Illinois State Board of Education includes that $200 million in its FY2015 General Fund budget report.

17

May 25, 2016

Illinois’ Fiscal Cliff


$36.7

$34.1

$32.1

$32.8

$29

$30

$31

$32

$33

$34

$35

$36

$37

$38

2014 2015 2016 2017

$ B

illio

ns

Fiscal Year

Revenue

Source: GOMB, 2014 Three Year Projection (Springfield, IL: January 1, 2014).

18

Impact on People

May 25, 2016

19


Net Illinois Income

Group

Total Difference

between 3.75% and

5% for Income

Bracket

% of Tax

BenefitAverage Cut

Average Net

Illinois Income

Average

Adjusted Gross

Income

% of Tax Filers

$0-$25,000 ($301,052,960) 8.1% ($106.89) $8,550.90 $18,964.43 50.4%

$25,001-$35,000 ($189,646,232) 5.1% ($372.32) $29,785.39 $39,082.14 9.1%

$35,001-$50,000 ($300,654,609) 8.1% ($526.45) $42,115.75 $51,775.10 10.2%

$50,001-$75,000 ($492,169,307) 13.2% ($768.78) $61,502.31 $71,740.42 11.5%

$75,001-$100,000 ($418,908,679) 11.2% ($1,080.17) $86,413.26 $97,258.15 6.9%

$100,001-$200,000 ($809,279,182) 21.7% ($1,677.04) $134,162.76 $146,324.98 8.6%

$200,001-$1,000,000 ($717,656,313) 19.2% ($4,371.34) $349,706.85 $365,598.00 2.9%

$1,000,001 or Greater ($503,206,395) 13.5% ($36,797.54) $2,943,802.83 $2,976,255.53 0.2%

Total ($3,732,573,676) 100.0% ($668.28) $53,462.03 $64,072.49 100.0%

Share of Tax Cut by Net Illinois Income—Illinois Residents Only

Source: CTBA analysis of the Illinois Department of Revenue’s Personal

Income Tax data for tax year 2011. Numbers do not add up due to rounding.

13%

54% Top 11%

Bottom 60%

And Poor State Fiscal Policy Does Trickle Down to Harm the Capacity of Local Governments


Source: CTBA analysis of U.S. Department of Education, National Center on Education Statistics, 2015. “Revenues and Expenditures for Public Elementary and Secondary Education: School Year 2011-2012 (Fiscal Year 2012).”

20

May 25, 2016

62.9%

28.3%

44.6% 45.2%

0%

10%

20%

30%

40%

50%

60%

70%

Local % Share State % Share

Illinois US Average

Local and State Share of Education Funding Spending

Illinois Total Property Tax Revenue Growth vs. State Median Income Growth

May 25, 2016

21


49.76%

6.33%2.71%

-0.96%

-10%

0%

10%

20%

30%

40%

50%

60%

1990-2005 2005-2013

Total Property TaxRevenue Growth

State Median IncomeGrowth

All data inflation

adjusted to 2013 using

CPI-U-RS

Income Data: US

Department of Census,

Current Population

Survey

Property Tax Data:

Illinois Department of

Revenue

Illinois Economic Growth Lags U.S. Long Term (1997-2014)

22


Source: Bureau of Economic Analysis

May 25, 2016

40.7%

20.4%

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

United States Illinois

Long Term GDP Growth (1997-2014)

Are High Taxes Hurting Illinois?No: Illinois is Low Tax Overall

23


Illinois’ total state AND local tax burden, as a percentage of personal income ranked in the bottom 10 of all states, for most of this period.

Illinois consistently had the second lowest tax burden in the Midwest to Missouri.*

*Data from Federation of Tax Administrators

May 25, 2016

Illinois is Low Tax Overall

24


Midwest States % National Rank

Iowa 17.0% 10th

Michigan 16.9% 12th

Wisconsin 16.6% 16th

Indiana 16.6% 17th

Ohio 16.1% 26th

Illinois 14.2% 42nd

Missouri 13.5% 47th

Source: Federation of Tax Administrators. Includes all state and local taxes and fees.

Total State and Local Tax Burden

as a Percentage of Income in 2010

May 25, 2016

Total State and Local Tax Burden as a Percentage of Income in 2012, with Temporary Tax Increase

25


Midwest States % National Rank

Iowa 17.0% 10th

Michigan 16.9% 12th

Wisconsin 16.6% 16th

Indiana 16.6% 17th

Ohio 16.1% 26th

Illinois 15.6% 27th

Missouri 13.5% 47th

Source: Federation of Tax Administrators. Includes all state and local taxes and fees; and CTBA calculation.

May 25, 2016

26


Illinois had the second lowest real GDP Growth in the entire Midwest in 2010

Real GDP Growth 2010

Indiana 4.6%

Iowa 3.1%

Michigan 2.9%

Wisconsin 2.5%

Ohio 2.1%

Illinois 1.9%

Missouri 1.4%

National and Midwest Average was 2.6%

But Despite Being Low Tax. . . . .

May 25, 2016

Is State Corporate Income Tax Policy Killing the Economy?

27


Illinois: 7% until 2015, then 5.25%

Midwest Other Big States

Iowa: 6% – 12% (12% @ $250,000) Pennsylvania: 9.99%

Indiana: 8.5% New Jersey: 9%

Wisconsin: 7.9% California: 8.84%

Missouri: 6.25% New York: 7.1%

Kentucky: 4% - 6% (6% @ $100,000) Florida: 5.5%

Michigan: 4.9%

May 25, 2016

Indeed—State Corporate Income Taxes Nationally are Insignificant

28


1998 2003 2007 2008 2009 2010

Total state corporate income taxes

paid nationwide* $31,089 $28,384 $52,915 $49,860 $39,278 $38,006

Net Income (before payment of

income taxes) of corporations

nationwide**$1,091,150 $1,175,609 $2,252,874 $1,806,890 $1,614,867 $1,836,377

Effective Total State Income Tax

Rate***2.85% 2.41% 2.35% 2.76% 2.43% 2.07%

*Annual Survey of State Government Tax Collections—U.S. Census Bureau

**SOI Tax Stats—Returns of Active Corporations – Table 1 – IRS

***Simple math—line 1 divided by line 2

Corporate Tax Liability Nationally ($ Millions)

May 25, 2016

Being Low Tax and/or Cutting Taxes is Not a Magic Economic Elixer


29

KANSAS

Significant taxes led to:

Economic growth that fell behind its neighbors and the nation

A decline in income

An explosion in deficits

A decline in credit ratings

MINNESOTA

Raised taxes which led to:

Budget surplus

Enhanced investment in services

Positive economic growth

Increasing Taxes the Right Way Won’t Hurt the Economy


2002-2011 Comparison:9 States with Highest Graduated Income Tax Rate vs. 9 States with No Income Tax

Source: Institute on Taxation and Economic Policy, States with “High Rate” Taxes are Still Outperforming No-Tax States (Washington, DC: February 2013). Figures 2,3 & 4

6.1%

-4.2%

8.2%

6.0%

-4.5%

5.2%

-6%

-4%

-2%

0%

2%

4%

6%

8%

10%

Average Unemployment Rate Change in Real MedianHousehold Income

Growth in Per Capita RealGSP

High Rate Personal Income Tax Rate States No-Personal Income Tax States

30

May 25, 2016

Indeed, Even the National Economy can Take Off Post a Tax Increase

31


Henry Blodget, Bombshell: New Study Destroys Theory That Tax Cuts Spur Growth, September 21, 2012 http://www.businessinsider.com/study-tax-cuts-dont-lead-to-growth-2012-9

Economic Growth Rates Following Periods of Tax Increases and Tax Cuts

May 25, 2016

Pension Re-Amortization and Current Law Comparisons ($ Millions)


$4,000

$6,000

$8,000

$10,000

$12,000

$14,000

$16,000

$18,000

2014 2018 2022 2026 2030 2034 2038 2042

State Contribution Schedule under Current Law Scenario A, 100% in 30 years Scenario B, 80% in 30 years Scenario C, Step Level Dollar

16

Revenues of Goods and Services as a Percent of Gross Domestic Product: Illinois (SIC 1965-1985, NAICS: 1997-2012)


Source: Bureau of Economic Analysis

33

51.35%53.35% 54.23%

57.44%

63.35%64.70%

66.59%

70.74% 71.90% 72.95% 72.49%

40.53%

36.74%35.29%

32.54%

26.78%25.42% 23.71%

19.93% 18.54%16.46%

17.47%

0.00%

10.00%

20.00%

30.00%

40.00%

50.00%

60.00%

70.00%

80.00%

1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2012

Services as a percent of State GDP Goods as a percent of State GDP

May 25, 2016

Personal Income Tax Revenue at 4.75% Compared to 3.75% ($ Millions)

May 25, 2016

34


COGFA estimate at

3.75%

CTBA estimate at 4.75%

Difference ($ Millions)

Personal Income Tax (gross) $14,766.0 $18,703.6 $3,937.6

Personal income tax refund amount $1,476.6 $1,870.4 $393.8

Fund for Advancement of Education $459.0 $561.1 $102.1

Commitment to Human Services Fund $459.0 $561.1 $102.1

Net Personal Income Tax Revenue $12,371.4 $15,711.0 $3,339.6

Source: CTBA analysis of COGFA data

One Issue with Responsiveness is a Base Problem—the Exclusion of all Retirement Income

35

Illinois is one of three states that does not tax retirement income

Illinois would raise $1.2 billion in revenue if some retirement income was subject to the income tax


AGI Bracket

Portion of Retirement

Income Added to Base

Revenue from Retirement Income

$50,000 or LESS 0% $0

$50,001-$75,000 25% $99,057,446

$75,001-$100,000 50% $190,998,341

$100,001-$150,000 75% $341,199,479

$150,001 or MORE 100% $565,534,861

TOTAL $1,196,790,127

Source: CTBA estimate using IDOR Illinois Individual Income Tax Returns with Retirement Subtractions: Tax Year 2012, http://tax.illinois.gov/AboutIdor/TaxStats/2012/IIT-Retirement-2012-Final.pdf

May 25, 2016

For More Information

Ralph M. Martire

Executive Director

(312) 332-1049

[email protected]


36

May 25, 2016

CTBA's principal goal is to ensure major policy systems work to promote social and economic justice. You can help strengthen

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a rational approach to fiscal policy and pension funding · 2016. 5. 26. · a rational approach to...

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