December 23, 2014
The following posts were among the most highly read on the Institute for Illinois’ Fiscal Sustainability’s blog in 2014 and represent the most closely followed Illinois fiscal issues of the year: State pension reform and the State budget.
States Face Legal Challenges Over Reduced Pension COLAs
January 3, 2014
This blog reviews legal challenges to reductions in state pension COLAs in several states, considering the basis of the lawsuit and the state’s level of constitutional pension protections. States often face lawsuits when they attempt to ease budgetary pressures by cutting pension payments to current employees and retirees, as Illinois’ passage of pension reforms did when Public Act 98-0599 was signed into law in December 2013.
Update: The law, originally scheduled to take effect on June 1, 2014, has been delayed by court action. The law was ruled unconstitutional by a Sangamon County Circuit Court Judge on November 21, 2014 and has been appealed to the Illinois Supreme Court. A November 25 IIFS blog discussed the ruling. The Illinois Supreme Court granted a request from the Illinois Attorney General for an immediate appeal and expedited ruling due to the significant impact the final ruling will have on the State’s financial condition. The court will hear oral arguments in March 2015.
Cost of Illinois' Retirement Income Tax Exemption
March 17, 2014
The post details the current and projected revenues Illinois is losing by exempting retirement income from the State income tax and compares Illinois’ policy to the income tax policies of other Midwestern states. Of the 41 total states that impose an income tax, Illinois is one of only three that exempt all pension income and one of 27 that exclude all federally taxed Social Security income. The Illinois Comptroller estimates that this exemption reduced the State’s individual income tax revenues by $2.0 billion in FY2012.
Update: The Civic Federation continues to recommend that State lawmakers consider including federally taxable amounts of retirement income in the income tax base as part of a comprehensive solution to Illinois’ ongoing financial crisis. The FY2015 State of Illinois Budget Roadmap included projections that showed the State could still access significant additional tax base even if it exempted the federally taxed retirement income for taxpayers earning less than $50,000 a year.
This blog discusses the FY2015 budget proposal for the State of Illinois presented by Governor Quinn that avoided a fiscal cliff by retaining temporary income tax increases that were scheduled to be phased out beginning in January 2015. In order to balance the budget and pay down a portion of the State’s backlog of unpaid bills in FY2015, Governor Quinn’s proposal required the State to borrow $650 million from other state funds, which must be paid back in future years.
Update: The FY2015 Enacted Budget does not extend income tax rates, causing a projected $1.9 billion drop in income tax revenues due to a partial phase-out of the temporary income tax increases that takes place January 1, 2015. This spending plan will increase Illinois’ backlog of unpaid bills to $6.4 billion at the end of FY2015, the first year-end increase since FY2012. IIFS’ FY2015 Enacted Budget Analysis found that the enacted budget represents a return to unsustainable fiscal practices and includes budgetary gimmicks that allow spending increases.
Actuarial Reports Show Illinois' Savings from Pension Reform Law
January 29, 2014
This post examines the first reports that provided a formal assessment of the financial impact of State pension reform law. At the time, the reports found the law was expected to reduce statutorily required State contributions by $144.9 million over 30 years and lower the unfunded pension liability by about $24 billion.
Update: As mentioned above, the law’s original implementation date of June 1, 2014 has been delayed by legal challenges. These original savings projections have been affected by measures including a lower assumed rate of return on investment for several State pension funds, discussed below. Preliminary State pension contributions for FY2016 have been calculated under the existing pension law and will need to increase by $682 million.
This blog discusses the Teachers’ Retirement System (TRS) reducing its assumed rate of investment return from 8.0% to 7.5%. The State Universities Retirement System (SURS) and the State Employees’ Retirement System (SERS) had also recently reduced their assumed investment rates of return, from 7.75% to 7.25%. The assumed rate of return is used to calculate the present value of future pension obligations.
Update: Preliminary State pension contributions for FY2016 calculated under the existing pension law require an increase of $682 million, largely due to reductions in these funds’ assumed investment rates of return. A November 6 IIFS blog details this increase.
Continue to follow the IIFS and Civic Federation blogs in 2015 for ongoing analysis of fiscal developments across Illinois. You can subscribe to both blogs via RSS feeds compatible for Microsoft Outlook, Gmail and most web browsers, as well as follow the Federation on Twitter for updates.