Here's the problem with Gov. Pritzker's latest pension plan

When Gov. J.B. Pritzker put his fiscal year 2025 General Fund budget proposal on the table last week, he did so from a position of strength. After all, the General Fund is as healthy as it’s been in over four decades, in large part due to Pritzker’s responsible fiscal stewardship.

Over the last five years, Pritzker’s administration has prepaid numerous state loans; put $700 million more into Illinois’ woefully underfunded public pension systems than required by law; and built the state’s rainy day fund up from a record low of zero dollars under former Gov. Bruce Rauner to more than $2 billion today — all of which explain the nine credit upgrades Illinois has received during Pritzker’s tenure.

Unfortunately, not all the fiscal news is good.

The biggest concern is the General Fund still has a structural deficit. A “structural deficit” exists whenever a tax system doesn’t generate enough revenue growth over an extended period of time to cover the cost of maintaining the same level of public services from year to year, adjusting solely for inflation, and repaying existing debt service.

It is this structural deficit that has historically constrained Illinois’ capacity to provide adequate levels of public services. That’s problematic for everyone, given that 94% of all General Fund spending on services goes to the four core areas of education, health care, human services and public safety.

To help alleviate some of the structural deficit’s impact, the FY 2025 budget proposal includes three recommendations for generating new revenue, all of which make sense.

Good ideas to raise revenue

First, Pritzker suggests generating $200 million by bumping the tax rate on sports wagering from 15% to 35%. Hard to argue against this proposition, given sports betting has exploded over the last few years, with adjusted gross receipts jumping from $380 million in 2021 to $611 million in 2022.

Frankly, no one should cry over sportsbooks having to pay some more of their windfall profits in taxes to help Illinois invest a little more in services like caring for homebound seniors or protecting abused and neglected children.

Pritzker also proposes to cap the corporate Net Operating Loss Deduction at $500,000 annually, to generate another $526 million. Capping the NOL deduction makes sense because the research shows there’s no statistically meaningful correlation between tax policy changes for businesses and job or economic growth. Hence, capping the NOL shouldn’t create any economic harm, while continuing to provide this tax break with no cap is highly unlikely to generate any public good in the form of job growth.

Finally, Pritzker proposes capping the “retailers’ discount” at $1,000 per month, which would generate another $101 million annually.

This program allows businesses that charge and collect Illinois’ sales taxes to keep 1.75% of what they collect as an administrative fee. Under current law, there’s no limit on the amount a retailer may keep. Because of that, Illinois has one of the most generous retailers’ discount programs of any state in the nation.

Given the advent of accounting software, the actual administrative costs associated with collecting the sales tax are minimal and easily recouped. In essence, big-box retailers are simply making an undeserved profit off this program — at the expense of funding things like public education or health care.

Tackling the pension problem

One of the more interesting proposals the governor made involves re-amortizing the $141 billion in debt Illinois owes its five public pension systems. Under the current repayment plan that passed back in 1995, the goal is to get the systems 90% funded by FY 2045, which would double the 45% funded ratio that exists today.

Pritzker instead proposes to get the systems 100% funded, in part by re-amortizing the payment schedule, and then extending the ramp until 2048.

While it makes all the sense in the world to establish a funded ratio goal of 100%, there are some key issues with the governor’s proposal.

For one thing, it doesn’t deal with the challenges created by the Tier II benefit structure, which is so inadequate that it doesn’t satisfy the safe harbor for exemption from Social Security. That’s problematic because Illinois relies on that exemption to avoid paying the cost of enrolling the vast majority of all state workers — including every teacher in Illinois — in Social Security. To be realistic, any new pension amortization should include the cost of a Tier II fix.

Second, the new amortization schedule is, like the current pension ramp, overly backloaded, with annual payments increasing at unaffordable rates over time.

It’d be far better to instead front-load repayments now, and utilize a level dollar amortization of the balance. Doing so under current law would save taxpayers over $42 billion in debt service, and still get the pensions 90% funded by FY 2045. Using a similar approach would save additional billions on the road to getting the pensions 100% funded by FY 2048.

Ralph Martire is executive director of the Center for Tax and Budget Accountability, a bipartisan fiscal policy think tank, and the Arthur Rubloff Professor of Public Policy at Roosevelt University. He is a regular contributor to the Sun-Times.

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