Burgeoning Pension Payment Adds to State’s Budget Woes

Lawmakers are scheduled to return to Springfield Nov. 29 to discuss several outstanding issues, including ongoing budget concerns and proposed tax breaks for Illinois’ employers. However, as legislators work to address budget issues for the current fiscal year, a new report shows the state’s annual pension obligation is set to increase by $1 billion next fiscal year.

Medicaid expenses were already projected to grow by more than $3 billion in the coming year, and reportedly the state’s pension obligation will increase from $6.4 billion in fiscal year 12 to $7.4 billion in FY 13. Sen. Ron Sandack (R-21st, Downers Grove) said the state’s obligations far exceed available revenues and stressed the necessity of scaling back spending.

“The clock is ticking and the debt is growing. We can either manage the problem or watch as it rolls over us,” Sandack said. “Illinois needs to align its priorities and budget accordingly. However, the state won’t even begin to address the problem until state spending is dramatically reduced, and efficiencies are drastically improved.”

Sandack noted that he’s introduced legislation, Senate Bill 2498, to end legislative pensions.

“Given the poorly funded status of the five state pension funds and past practices of underfunding and/or borrowing against the state’s retirement funds, shouldn't the General Assembly lead by example?” said Sandack, who does not participate in the legislative pension system.

The state’s burgeoning Medicaid and pension obligations further undermine ongoing talks with major Illinois employers seeking state tax breaks. Hearings began on Nov. 16 in the Illinois House on proposed changes to tax laws that are being sought to address financial concerns raised by two major Illinois employers. The CME Group, which maintains the Chicago Mercantile Exchange, and Sears have threatened to leave the state for more business-friendly locations unless an incentive package is negotiated to ease the onerous tax burden associated with the Democrats’ January 2011 tax hike.

While state leaders work on a compromise to retain these important employers, Illinois’ budget constraints make it difficult to negotiate the important, but costly, incentive package. While the latest tax cut measure being circulated would initially save the state money, by the third year it would actually cost the state as much as $850 million.

Additionally, a retroactive change in the tax code being considered by lawmakers to help cover the cost of incentives and tax breaks could create problems for other Illinois companies. Several small business owners testified that a proposed retroactive change in how businesses would calculate deductions on the depreciation of new equipment would be a huge fiscal blow for employers whose budgets were based on deductions outlined in the current tax code.

Though negotiation of a business tax relief package faces hurdles, Sandack pointed out an important measure was passed during the fall veto session that will save businesses approximately $400 million. Lawmakers joined business and labor representatives to negotiate Senate Bill 72, which outlines a plan to restore the Unemployment Insurance trust fund to solvency.

Unlike the state’s other financial challenges, the negative balance of the state’s Unemployment Insurance Fund is the direct result of the economic downturn that forced employers to reduce their workforce. The increase in people drawing unemployment has bankrupted the trust fund. Without the legislation, employers would have faced new federal penalties and higher costs; if signed into law.

The new bill will save Illinois employers almost $400 million and prevent the state from having to pay $240 million in interest payments to the federal government. Almost half of all Illinois employers will see a reduction in payments under the plan.

The legislation also includes reforms that will allow the state to recoup improper unemployment insurance payments, and pursue those who abuse the system. It also includes incentives that will encourage both business and labor to return to the bargaining table in the future to assure continued solvency of the fund.