By: Mitchell Serota*

The biggest problem facing our State is the Unfunded Actuarial Liability (“UAL”) of the five State-sponsored pension plans, which has officially been declared to be $133 billion.  (I believe the real number exceeds $200 billion, but a discussion of how to determine the UAL distracts from the matter at hand.) To nobody’s surprise, this issue, which overwhelms all other issues by its enormity, is being shunted aside by the two principal gubernatorial candidates who would rather talk about toilets and Legionnaire’s Disease.  Even in the debates, the UAL was given short shrift by television newscasters more concerned with keeping the candidates to two-minute time limits than probing for a substantive answer to the most pressing problem we face.

$133 billion is an enormous amount of “real money” that would impress even the late Sen. Dirksen.  The population of Illinois is estimated at 12.8 million, which means there is an obligation for each citizen, from infant to superannuated senior, to pay over $10,000 in order to make good on the promise to the State employees.  It need not be paid immediately, but it does have to be coughed up eventually. Put in this perspective, the taxpayer is more likely to gag than cough.

To lessen the crisis, Gov. Rauner proposes a framework called “Consideration.” Presumably, a Tier I State employee would be given a choice between cutting his pension cost-of-living increases or putting a lid on the salary that is included in the pension calculation.  “Consideration” is not likely to pass the legal impediment known as the Illinois Constitution, and Rauner knows it.  This “dead on arrival” idea seems less a serious solution than a cynical tactic to scare pensioners into accepting a cut or risk getting left with nothing.

Last year, Rauner spoke openly about his hope for federal legislation authorizing bankruptcy for states. That way, the pension conundrum would be left to the courts, similar to what happened in Detroit.  With no other solution being offered, Illinois would be headed towards the distinction of being the first bankrupt state in the history of our nation.

J.B. Pritzker, for his part, recognizes that a constitutionally guaranteed promise has been made to State employees and it is his devout intention to keep it.  That would mean each of us will have to pay the $10,000 figure mentioned above.  In semi-private meetings, he had proposed paying off the UAL over 15 years.  The intention is laudable, because the next generation of Illinois residents would not have to shoulder this crushing debt.

But what he does not say, and what I have estimated, is that to pay for this, flat rate income tax rates will have to increase from 5% to 9.5%.  (My calculation shows the increase on households, assuming four individuals per household.  If corporate income tax increases, the individual tax rate would not be as large.)  The highest rate on the graduated income tax he talks about would be confiscatory.  This, then, is his “dead on arrival” idea.

Simply stated, the incumbent will solve the pension crisis by bankrupting the State while the challenger will solve the crisis by bankrupting the people in the State.  Two classes of citizens benefit from the absence of an honest debate of practical solutions: some elite pensioners and owners of moving companies.

*Dr. Mitchell Serota is a fully credentialed pension actuary (Fellow of the Society of Actuaries, Member of the Academy of Actuaries, Enrolled Actuary) who sits on two national committees focused on retirement plans in the U.S.

Guest articles reflect the personal opinions of the author only and do not necessarily represent the viewpoint or research of Wirepoints.

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K L
1 year ago

Bankrupt the state.

Andrew Szakmary
1 year ago

The typical middle class person who lives in New York City pays 9.5% or more of their income in state and local income tax, and has done so for many decades. All this time the city’s population has grown markedly, and I suspect that at least 95% of the folks who live there have never declared bankruptcy despite the high cost of living piled on top of the high taxes they pay. Could you actually present some evidence for the glib assertion that a 9.5% tax rate will bankrupt the people of Illinois, when that did not happen elsewhere, or… Read more »

Marcia
1 year ago

Hmmm…you say the city population has grown….what is already happening to Illinois population? Do you think higher taxes will bring in more population if all of the money goes to past debt payments? I’m trying to understand your point but I’m just not following how it applies to the situation in Illinois?

P M
1 year ago

What is so bizarre about this is the public sector thinks the very society they labored so long to descend into debauchery and decadence should now feel some sort of moral obligation to pay for the promises corrupt politicians made to themselves and those who put them in office. It isn’t a matter of can the taxpayers pay, it is a matter of why should they pay? Promises you may say? Hmmm…were not we promised that the tollways would be freeways also? You see fidelity, promises, and morals were once rather absolute concepts,the public sector are the very ones who… Read more »

nixit
1 year ago

The typical middle class person who lives in Houston pays ZERO of their income in state and local income tax, and has done so for many decades. All this time the city’s population has grown markedly, and I suspect that at least 95% of the folks who live there have never declared bankruptcy despite the low cost of living piled on top of the low taxes they pay. Could you actually present some evidence for the glib assertion that a ZERO tax rate will bankrupt the people of Illinois, when that did not happen elsewhere, or is that too much… Read more »

P M
1 year ago
Reply to  nixit

Nixit, you are killing me – LOL

nixit
1 year ago
Reply to  P M

These NYC comparisons are so played. The freakin’ financial capital of the world, one of two Alpha++ cities on the entire planet, fashion-mecca, dumping ground for Chinese and Russian mega-billionaire real estate investors looking to hide large chunks of their fortunes beyond the reach their corrupt governments…this is our tax policy barometer? If you can tax it there, you can tax it anywhere?! Utterly ridiculous.

Mr_Common_Sense
1 year ago
Reply to  nixit

Nailed it! Put yourself in for a raise at work!!

Douglas
1 year ago

Wall Street is married to NYC because they own the court system there, they can’t leave. Chicago has no such beholden group, corporations and people will leave in droves!

P M
1 year ago

Well the solution for the taxpayer is mentioned – leave. I am 50 something and I cannot remember a single day in my life when Illinois was a place you aspired to, it always has been a place you fall down to. What does Illinois have that recommend it? It has a bland endemic culture that is being decimated by illegal aliens and third world immigrants. Culturally, Illinois once had a midwestern work ethic that featured self reliance and pride, that is now gone; it wasn’t sexy but it was honest and something to be proud of. Now this is… Read more »

Bross71760
1 year ago

And if 47% of the citizens leave? I doubt that ever happens. The housing collapse will strand most. But if 10% of the population leaves, then what? Not 12.9 million but 11.6m. As you have said before. You just can’t make the math work. And I can only imagine how angry Illinois taxpayers would be. Maybe, just maybe they might wake up and revolt.

Brian
1 year ago
Reply to  Mark Glennon

Ted Dabrowski had a recent article stating that roughly 600 (really rich) Illinoisans account for half of the states taxable income. If a good percentage of these people change their residency out of Illinois, the state is screwed as well.

jeff
1 year ago
Reply to  Bross71760

Don’t be so sure on a lot of residents. It won’t be 47% but remember, homes can go underwater vs the mortgage. Why not walk away and try for opportunity somewhere else? It happened in Detroit for different reasons.