Sorry, Illinois, Your Taxes Aren't Going Down Anytime Soon

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(Bloomberg) -- Illinois residents could enjoy lower taxes if their squabbling leaders tackle the debt-riddled state’s biggest problem -- its massively underfunded pension system. But that’s a big if.

Republican Governor Bruce Rauner, who’s running for re-election this year, says he could lower taxes by as much as $1 billion. First, lawmakers must address a crisis that’s vexed the state for years, and get a plan cleared by the courts soon.

“When I sign it, we’ll get that in front of our state judiciary,” Rauner told reporters in Chicago this week. “Once they bless it as constitutional, then we will have a billion dollar income tax cut for the people of Illinois.”

But if history is any guide, that’s not likely to happen. Pension reform has eluded Illinois for years, allowing its retirement debt to balloon to $129 billion.

Rauner said he’s willing to sign onto what is known as a consideration model for pension reform, which in part allows state employees to choose lower, delayed cost-of-living adjustments in return for ensuring that their future raises count toward pensions. Such a measure passed the state Senate last May, and would save approximately $1 billion, according to supporters. Rauner has urged the state’s House of Representatives to pass it.

House Speaker Michael Madigan “believes meeting the test established by the Supreme Court is imperative,” Steve Brown, a spokesman for the top Democrat who controls much of the legislative agenda, said in an email. Brown said he’s not aware whether the bill’s sponsor has convinced members that the bill would meet court approval.

But opponents say that plan violates Illinois’s constitutional ban on lowering benefits, signaling a court challenge is likely. Even if the law prevails, it could take years to wind through the courts.

Lawmakers in 2013 approved a restructuring of the pension system that would have cut cost-of living adjustments and raised the retirement age for some workers. The measure was estimated to save more than $100 billion over 30 years. But unions sued, halting its implementation.

In May 2015, the Illinois Supreme Court struck down the overhaul, saying it illegally cut benefits. Since then, little progress has been made as the unfunded liabilities keep growing and politicians keep blaming each other.

Now, not only does a lack of agreement on comprehensive pension reform signal that Rauner won’t be able to cut taxes as promised, it also could mean Illinois actually may need to raise revenue.

Pension costs consumed 18 percent of Illinois’s own-source revenues last year, according to Moody’s Investors Service. The state’s pension payments to the five retirement systems from 2019 to 2023 are projected to top $47 billion, according to the Commission on Government Forecasting and Accountability.

“The likely growth in their pension funding needs over time means that new revenues will probably be part of the state’s fiscal future,” Ted Hampton, Moody’s lead analyst on Illinois, said in an interview.

©2018 Bloomberg L.P.

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