Tuesday, March 10, 2009

Challenges for Gov. Quinn's first budget

By Bethany Jaeger, with Jamey Dunn and Hilary Russell contributing
Gov. Pat Quinn said he’s trying to come up with the “least bad option” to navigate the state into fiscal and economic recovery “because there are no good options.”

When he proposes his first state budget and spending plan before the full General Assembly next Wednesday, he said “it’ll have some castor oil in it, but when you take castor oil, hopefully it’ll get better in the long run.”

That castor oil could come in the form of tax increases, spending cuts, public employee pension reforms and a way to finance a long-term capital plan for road and school construction. None of those is easy to swallow, particularly when his plan is sandwiched between a nationwide economic crisis and an alleged corruption spree that has crippled voter confidence.

Tax increases
One online survey conducted last month by Zogby International indicates that the majority of 644 likely voters rejected two revenue options on the table. Slightly more than a quarter of the respondents said they could support an income tax increase, while about 13 percent said they could support broadening the state sales tax to include services. But more than half, about 55 percent, said that they supported neither and that the state needed another plan.

Slightly more than half also said they would be less likely to vote for a member of the General Assembly who supported a tax increase.

Zogby International conducted the poll on behalf of the Independent Insurance Agents of Illinois and the Illinois Insurance Association. John Zogby spoke to the groups in Springfield Tuesday afternoon and said that when voters do not want tax increases, budget cuts, increased spending or tax cuts as possible solutions to the economic downturn, “they’re not being stupid” and “they’re not being fickle.” He said voters would start to see progress and grow more confident “when the orange cones go up, when the roads are starting to be paved, when the money actually gets in to the communities.”

Zogby said that if the survey would have framed the questions as either-or situations such as increasing income taxes or cutting education funding, voters would have responded differently. “If you throw out a tax increase and are not able to sell it, that’s the kind of result you’re going to get,” he said of the survey results.

Spending cuts
Quinn said in his Statehouse office Tuesday afternoon that trimming state spending is the No. 1 focus. “We have to cut, cut and cut costs in the budget” to economize and save money for the taxpayers. He didn’t specify but repeated that “everything is on the table,” which could refer to anything from reducing state headcount to pulling back on educational grants. He said the core priorities of state government are public safety, education, health care and, right now, a $25 billion capital investment program that creates jobs.

“You have to cut wherever you can,” he said. “There are some things that we’d like to do normally, but if in a tough economic time, you have to cut back. I think that’s what people understand. Nobody’s happy about this.”

A special Senate committee is trying to look specifically at ways to cut state government services; yet, officials and advocates for education last week and for health care this week more often stated why their programs could not be sacrificed. Instead, some supported calls for a state income tax increase to bring in new revenue. Two more meetings about ways to reduce state spending will be held before March 24 and will touch on public employee pensions and state government operations, as well as ideas for new revenues and reductions.

On Tuesday, the committee heard from the Civic Federation, a nonpartisan think tank in Chicago. It just launched a new Institute for Illinois’ Fiscal Sustainability and issued a new report that calls for reducing spending, avoiding the creation of new programs and implementing a construction and infrastructure plan. One suggestion for reducing Medicaid costs, for instance, is to move some mental health patients from long-term care services that do not receive federal matching funds. Instead, the federation reported that clients could be moved to services that offer more integrated settings, which would receive federal matching funds and which could potentially save hundreds of millions of dollars.

Quinn said part of the need to cut back on spending is so that the state can have enough cash to pay its service providers, particularly medical providers who are at risk of closing their doors or laying off employees because they don’t get reimbursed by the state for months at a time.

More than 200 health care providers rallied at the Capitol Tuesday with Comptroller Dan Hynes to support a measure that would ensure that they got paid in a more timely manner. “This is just a small sampling of the thousands of providers who are desperate right now for relief,” Hynes said during a Senate committee. “These are small business owners. These are frontline service and social safety net services in our communities, and they have been devastated by these delays. They need our help.”

Hynes is again supporting a measure that would prohibit the state from deferring Medicaid bills into the next fiscal year, which has often happened as a way to make the current year’s budget appear balanced.

Pension reforms
Another area subject to reforms is public employee pension systems. Quinn said he’s considering a two-tiered system, meaning that existing employees would keep their current pension benefits but that new hires would receive lower benefits.

“We want to make sure we have adequate money not just to pay the pensions of public employees, which is an important policy goal and it’s a legal requirement, but we also want to have money to invest in health care and education and having public safety,” Quinn said. “So there’s a lot of balancing.”

While the idea has support from such think tanks as the Civic Federation, it has strong opposition from such public employee unions as the American Federation of State, County and Municipal Employees Council 31.

The Civic Federation’s report suggests ways to chip away at the state’s $73 billion unfunded pension liabilities. One idea includes imposing a moratorium on new employee benefits until the pension system had enough assets on hand to fund 90 percent of its liabilities.

“It would not be imperative to have to change the pension benefits if, in fact, the state could afford them,” said Laurence Msall, president of the Civic Federation. “But the fact it has not fully funded them for over 30 years is a strong indication to the Civic Federation that the benefits are unaffordable, and there is no comparable type benefit program in the private sector. You just don’t see people retiring after 20 years of service with a defined benefit that goes up by 3 percent a year and that allows for free health insurance.”

He said the federation’s No. 1 recommendation to the state is to stop digging and making the problem worse. “These runaway pension costs are compounded by the under-funding, but inherent in the under-funding is the state’s 30 years of not adequately funding them. And if the state was able to afford this generous of benefit, it would be funding them.”

AFSCME Council 31 said the public employee benefit levels are modest and below the national average, and they’re not the problem, according to spokesman Anders Lindall. Rather, he said, the problem is that previous governors and legislatures have chronically failed to adequately pay the state’s contribution into the pension systems, creating a mountain of unfunded liabilities.

“Cutting pensions and undermining retirement security for state employees is wrong, period,” Lindall said. “And AFSCME will oppose any unfair two-tiered system that would have employees doing equal work for unequal benefits. It’s important to know that the average benefit for a current retiree is $1,500 a month, about $18,000 a year. I think anybody that would consider that gold-plated is out of touch with reality.”

However, even legislators such as Rep. Joe Lyons, who describes himself as a pro-labor Democrat, know they have to keep an open mind and prepare for some politically tough votes this year. “It’s one of these very bitter, bitter pills that we’re going to have to at least think about swallowing,” he said.

Members of the General Assembly already have tiered pension benefits, depending on when they were elected. And Rep. Kevin McCarthy, an Orland Park Democrat who chairs the House committee on pensions, said he’s proposed a measure with the support of House Speaker Michael Madigan that would change the General Assembly’s pension system from a “defined benefit” to a “defined contribution” plan. It would create a 401(k)-type system where legislators paid into their retirement accounts, and the state matched that amount up to a certain percentage.

“People have to realize that this is a system that we just cannot afford in the long term,” McCarthy said, adding that the legislation would start with the General Assembly’s retirement system and then extrapolate whether it would work for the four other pension systems for teachers, state employees, university employees and judges.

Quinn said he does not plan to propose a 401(k)-type system for public employees.

We'll have much more on reform proposals in the next week.

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