a rational approach to fiscal policy and pension funding · 2016. 5. 26. · a rational approach to...
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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
© 2016, Center for Tax and Budget Accountability
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
© 2016, Center for Tax and Budget Accountability
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
© 2016, Center for Tax and Budget Accountability
$
$
$
$
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 ($1,850) -7.5%
© 2016, Center for Tax and Budget Accountability
Sources: FY2016 from GOMB’s “Operating Budget Detail,” February 2015; HB 317 of the 99th General Assembly;
COGFA, FY2015 Budget Summary (Springfield, IL: August 1, 2014); and, GOMB, Illinois State Budget: Fiscal Year
2016 (Springfield, IL: February 18, 2015), CH. 3-6.
Comparison of Democrats’ Proposed 2016 Budget vs. Governor’s 2016 Budget
May 25, 2016
6
© 2016, Center for Tax and Budget Accountability
CategoryFY2016
Governor
FY2016
Democrats$ 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
© 2016, Center for Tax and Budget Accountability
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
© 2016, Center for Tax and Budget Accountability
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
9
$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.
© 2016, Center for Tax and Budget Accountability
What About Pension Benefits? Not the Problem
May 25, 2016
11
© 2016, Center for Tax and Budget Accountability
-$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
© 2016, Center for Tax and Budget Accountability
$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%
© 2016, Center for Tax and Budget Accountability
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.
© 2016, Center for Tax and Budget Accountability
*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
© 2016, Center for Tax and Budget Accountability
$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)
© 2016, Center for Tax and Budget Accountability
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)
© 2016, Center for Tax and Budget Accountability
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
May 25, 2016© 2016, Center for Tax and Budget Accountability
$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
© 2016, Center for Tax and Budget Accountability
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
© 2016, Center for Tax and Budget Accountability
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
© 2016, Center for Tax and Budget Accountability
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
© 2016, Center for Tax and Budget Accountability
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
© 2016, Center for Tax and Budget Accountability
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
© 2016, Center for Tax and Budget Accountability
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
© 2016, Center for Tax and Budget Accountability
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
© 2016, Center for Tax and Budget Accountability
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
© 2016, Center for Tax and Budget Accountability
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
© 2016, Center for Tax and Budget Accountability
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
May 25, 2016© 2016, Center for Tax and Budget Accountability
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
© 2016, Center for Tax and Budget Accountability
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
© 2016, Center for Tax and Budget Accountability
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)
May 25, 2016© 2016, Center for Tax and Budget Accountability
$4,000
$6,000
$8,000
$10,000
$12,000
$14,000
$16,000
$18,000
2014 2018 2022 2026 2030 2034 2038 2042
State Contribution Schedule under Current Law Scenario A, 100% in 30 years Scenario B, 80% in 30 years Scenario C, Step Level Dollar
16
Revenues of Goods and Services as a Percent of Gross Domestic Product: Illinois (SIC 1965-1985, NAICS: 1997-2012)
© 2016, Center for Tax and Budget Accountability
Source: Bureau of Economic Analysis
33
51.35%53.35% 54.23%
57.44%
63.35%64.70%
66.59%
70.74% 71.90% 72.95% 72.49%
40.53%
36.74%35.29%
32.54%
26.78%25.42% 23.71%
19.93% 18.54%16.46%
17.47%
0.00%
10.00%
20.00%
30.00%
40.00%
50.00%
60.00%
70.00%
80.00%
1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2012
Services as a percent of State GDP Goods as a percent of State GDP
May 25, 2016
Personal Income Tax Revenue at 4.75% Compared to 3.75% ($ Millions)
May 25, 2016
34
© 2016, Center for Tax and Budget Accountability
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
© 2016, Center for Tax and Budget Accountability
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
rmartire@ctbaonline.org
© 2016, Center for Tax and Budget Accountability
36
May 25, 2016
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