Illinois | Pension360

Could a “Retirement Tax” Help Illinois Climb Out of It’s Fiscal Hole?

Illinois is in a fiscal bind, and Rich Miller—founder of CapitolFax and tab-keeper on all things Illinois politics—explores in his recent column a policy that could raise $2 billion dollars.

The idea: levying a tax on retirement income.

From Miller:

Illinois is facing a $4 billion hole in its 2015 budget when the 2011 income tax increase automatically starts to roll back on Jan. 1. That’s a huge headache for whoever wins the Nov. 4 election, Gov. Pat Quinn or Republican nominee Bruce Rauner.

Illinois is leaving $2 billion on the table by not taxing retirement income, studies have shown. That missed revenue is escalating every year. Total retirement income in Illinois is growing by 6.5 percent a year, compared with just 1.9 percent annual growth for personal income that is taxed, according to a study by the Civic Federation.

Illinois is one of just three states that exempt pension income from taxation, according to the Chicago Metropolitan Agency for Planning.

Former Illinois Gov. Jim Thompson, who passed the law outlawing retirement income taxation, had this to say on the issue:

“There’s a whole lot of people in this state who are trying to exist on just Social Security or a low governmental pension,” he says. Senior citizens already pay federal income taxes, “and once they get through doing that there’s not enough left, especially when the state income tax has jumped up to the place it is.”

To that, Miller proposes an idea that might be more palatable to opponents of the tax:

The Civic Federation found that taxpayers earning less than that accounted for only about a quarter of total retirement income in the state. So taxing retirement income above $50,000 would still bring in $1.5 billion a year, which is nothing to sneeze at.

Not to mention that barely a third of Illinois seniors even know that their income isn’t being taxed in the first place, according to a Capitol Fax/We Ask America survey of 816 Illinoisans age 65 and over that I commissioned.

Both Gov. Quinn and Bruce Rauner have publicly stated they won’t support a tax on retirement income.

A tax on retirement income is overwhelmingly unpopular among seniors, as Rich Miller found out when conducting an informal survey.

When Miller asked seniors whether they would support a policy of taxing retirement income, 88 percent responded “No”.

Photo by Chris Eaves via Flickr CC License

Chicago Proposes Telephone Tax to Shore Up Pension Funding

Chicago politicians have been putting their heads together in recent months, trying to come up with ways to solve—or at least head off—the outstanding pension obligations that threaten to cripple the city’s finances.

A recent law mandates that the city make lump sum payments into the System each year to the tune of hundreds of millions of dollars. It’s up to lawmakers to find that money.

The first idea to increase was property taxes. But the move is so politically unpalatable that Illinois Pat Gov. Quinn struck a deal with Chicago: in exchange for the promise of no property tax increases, Quinn signed a bill that increased employee contributions to the city’s pension systems while also reducing employee benefits.

Now, many alderman have thrown their support behind a new idea for raising money: a telephone tax. More specifically, a 56 percent increase of the current telephone tax. From the Sun-Times:

Effective Sept. 1, the City Council’s Finance Committee agreed to raise the surcharge from $2.50 to $3.90–$1.40 more-per-month or $16.80-a-year–for every land line and cell phone in Chicago. The tax applied to pre-paid phones will rise from 7-to-9 percent, effective Oct. 1.

A family of four with four cell phones and a land-line would end up paying $84 in additional taxes each year. That’s $34-per-year more than the $50 price of Mayor Rahm Emanuel’s original plan to raise property taxes by $250 million over a five-year period to shore up two of Chicago’s four city employee pension funds.

On Tuesday, the Finance Committee honored the mayor’s promise without a single dissenting vote. That’s how eager they all are to avoid a property tax increase — the third rail of Chicago politics—seven months before the election.

The new revenue–$10 million this year and $40 million in 2015–will be used to “fully-fund” Chicago’s 911 emergency center and the Office of Emergency Management and Communications that runs it, thereby freeing up $50 million “to be contributed for the first payment” to reform the Municipal Employees and Laborers pension funds.

Taxing telephones is politically preferable to raising property taxes, which was the other option to raise funds to pay down Chicago’s outstanding pension obligation. Raising property taxes is a political no-no in the city.

But the telephone tax might turn out to be more costly, to both Chicago residents and the city itself. And some alderman have publicly wondered whether the city and the state are playing a political game. From the Sun-Times:

The fact that some Chicago families could end up paying more did not seem to bother most aldermen.

“Even though it may cost a little more because you have more lines and phones, I’d rather come up with an additional $5 or $10 than to come up with $150 [all at once]. It may not be as much pain monthly as it would be at one time,” said Budget Committee Chairman Carrie Austin (34th).

Budget Director Alex Holt added, “For some people, it may be more costly [than a property tax hike]. For others, it will be less costly. It’s going to be different for every home.”

Emanuel has emphatically denied that the phone tax was part of a political “shell game” to get past the Nov. 4 gubernatorial election and the Feb. 24 city election for mayor and aldermen, then sock it to taxpayers.

Ald. Scott Waguespack (32nd) said Tuesday he doesn’t buy it.

“We had this whole property tax issue on the table. Then, I thought I saw somebody [Emanuel] specifically say we’re holding it off for a year. Which means, it’s back on the table after the election,” Waguespack said.

“So, this is just to me sort of a short-term fix. It doesn’t solve the bigger structural problems we have. And it doesn’t put any other solutions on the table that we’ve had three years of talking about and haven’t proposed anything.”

Chicago’s largest fund, the Chicago Municipal Employees Annuity & Benefit Fund, was only 37 percent funded as of December 2012, according to the fund’s most recent annual report.

Photo: Pete Souza [Public domain], via Wikimedia Commons

Illinois Supreme Court Ruling Casts Bad Omen on State’s Pension Reform

While the rest of the country celebrated Fourth of July weekend, members of the Illinois pension sphere got to watch some fireworks of their own. A key Illinois Supreme Court case was decided over the weekend, and the decision does not bode well for the state’s landmark pension reform. (The full court opinion can be read at the bottom of this page.)

According to the 6-1 decision, the pension protection clause — which says that retirement benefits are a contractual agreement that “cannot be diminished or impaired” — applies to other retirement benefits, not just pensions. That overrode the state’s argument that its emergency powers, in dealing with its budget crisis, justified an increase in what retirees must pay for their health benefits.

The court rejected the state’s argument that health care benefits are not covered by the pension protection clause, finding that there is nothing in the state constitution to support that. The only question now is whether the reduction in the state’s health care subsidies constituted an impairment or diminishment of those benefits.

Although the ruling doesn’t directly apply to pensions, the writing seems to be on the wall.

“If the justices can read the pension clause of the constitution to protect health benefits, they certainly would use it to protect pension benefits,” former state Budget Director Steve Schnorf said.

“This bodes very, very ill” for the pension cuts the Legislature approved for state workers, and for a similar set of trims Mayor Rahm Emanuel wants for his workforce, he added.

Time after time, without finally resolving the issue, the court seemed to go out of its way to knock down any changes not agreed to by workers unions, and perhaps by each individual worker.

For instance, one argument defenders of the new pension law have offered is that unfunded pension liability now is so large — $100 billion in the state funds, and at least $32 billion in the city funds, for instance — that government has a right to order changes, using its so-called police powers, to set spending priorities. But, said the court, “In light of the constitutional debates, we have concluded that the (pension) provision was aimed at protecting the right to receive the promised retirement benefits, not the adequacy of the funding to pay for them.”

In other words, pony up.

And as far as Cost-of-Living Adjustments:

Another argument offered by reform proponents is that annual cost of living adjustments in pensions are not protected by the state constitution in the same way that a person’s original pension is. In other words, a worker who initially got, say, a $3,000-a-month pension is entitled to get it and no more in the future, regardless of inflation. COLAs are far and away the biggest element in the retirement-funding crisis.
But, ruled the court, “Under settled Illinois law, where there is any question as to legislative intent and the clarity of the language of a pension statute, it must be liberally construed in favor of the rights of the pensioner. ”
So, the current 3 percent guaranteed annual COLA would appear to be here to stay.
Ironically, such an interpretation would apply both to the pension reform bill pushed by Gov. Pat Quinn that’s working its way up to the Supreme Court and to an alternative plan offered by his opponent Bruce Rauner. The GOP gubernatorial candidate proposes moving workers to a defined-contribution system that caps state funding.

Many believe lawmakers should now be scrambling to come up with a Plan B to reform pensions in a way allowed by the courts:

State and local lawmakers had better get working on a Plan B. Illinois needs alternatives to the state pension-reform law passed in December and to the Chicago pension-reform law passed in May. The options are limited — it may come down to a constitutional amendment — but the state’s best minds better get cracking.
It isn’t an exaggeration, even in the slightest, to say Illinois’ future depends on it.

There is now but one key question: Does a viable pension reform alternative exist? A bill pushed by Senate President John Cullerton, considered an alternative by many, is now almost certainly off the table. That bill gave workers a choice between full pension benefits or subsidized health care — choose pension benefits and health care would be cut. Given Thursday’s ruling, that now seems highly dubious.
One possibility would be to amend the constitution to modify the pension protection clause — not eliminating it but weakening it some. However, this is a lengthy process and may still not protect the state legally if it reduces benefits already promised.

Read the court’s entire opinion here:

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Photo by Mr.TinDC via Flickr CC

Illinois judge halts reforms until constitutionality determined

When Illinois lawmakers passed their landmark pension reform law in December, they marked their calendars for June 1, 2014.

That’s the date the law was supposed to go into effect, but lawmakers, unions and most citizens knew better—a myriad of legal challenges would surely push back the implementation of the reforms and pave the law’s path to the state Supreme Court.

Today, an Illinois judge confirmed that sentiment when he ordered a temporary restraining order on the law that will prevent it from taking effect on June 1. The ruling ensures that the law won’t go into effect until the legal battles over the law’s constitutionality are resolved.

The decision is a major victory for the group whose challenge catalyzed today’s judgment: We Are One Illinois, a coalition of retiree groups and unions.

From the Chicago Tribune:

The groups argued the law is unconstitutional because it scales back benefits and raises retirement ages. Under the Illinois Constitution, public employee pensions are a “contractual relationship” with benefits that cannot be “diminished or impaired.”

“This is an important first step in our efforts to overturn this unfair, unconstitutional law and to protect retirement security for working and retired Illinois families,” said Michael T. Carrigan, president of the Illinois AFL-CIO, the point man for the union coalition.

Judge John Belz recognized the retirees and others in the pension systems could suffer “irreparable harm” if the law is allowed to go forward while the constitutionality issues is still being fought out in the courts, according to his order. The case is expected to wind up in the Illinois Supreme Court.

The decision won’t affect Illinois’ budget; lawmakers anticipated the legal challenges against the reform law, and didn’t incorporate its projected effect into the budgets for fiscal year 2013 or fiscal year 2014, which begins July 1.

Photo Credit: SalFalko via Flickr Creative Commons License

Retirements in Illinois surge as workers try to shield pensions from reform law

In a normal month in Illinois, the state expects about 200 public workers to retire.

Apparently, last April wasn’t a normal month. That’s because an estimated 1,100 state workers retired in April 2014 in an attempt to lock in their pensions, which could otherwise be affected by the state’s pension overhaul, signed into law in December.

It’s unknown whether early retirements will actually protect pensions from the reform measures. And while the staggering number of retirements caught state legislatures off guard, representatives from labor groups are less surprised.

From the Saint Louis Post-Dispatch:

Anders Lindall, spokesman for the American Federation of State, County and Municipal Employees Council 31, said the increase in retirements is not a surprise.

“It’s indicative of the harm done to employees and retirees and the complications posed by the implementation of Senate Bill 1,” Lindall said.

It’s not just state workers who are leaving the work force because of the changes.

Thousands of university employees also are retiring sooner than they expected because of mistake in Senate Bill 1 that calculates a university employee’s benefits as of last year instead of this year.

Lawmakers have pledged to fix the mistake, but that hasn’t stopped the departures.

Illinois’ pension overhaul, which raises retirement ages and decreases COLAs, among other things, was set to go into effect on June 1, 2014. But various legal challenges may push that date back.

Until then, the state’s public workers are left to roll the dice on whether they should retire early for a chance at an un-modified pension.

Photo Credit: TaxCredits.net via Creative Commons License

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