Needed: Painful grand compromise in Illinois

For every dollar I pay in federal income tax, I pay only $0.13 to Illinois. That’s just not enough.

Me in the Chicago Tribune.

Illinois has a $13 billion deficit, alongside very serious long-term budget challenges. Taxpayers–especially the affluent–must pay higher income taxes. Politicians must submit to a more transparent and disciplined budget process. Public employees must renegotiate some unsustainable retirement arrangements. And the media must raise its game to cover these issues with the required diligence and depth. There really is no alternative at this point.

Author: Harold Pollack

Harold Pollack is Helen Ross Professor of Social Service Administration at the University of Chicago. He has served on three expert committees of the National Academies of Science. His recent research appears in such journals as Addiction, Journal of the American Medical Association, and American Journal of Public Health. He writes regularly on HIV prevention, crime and drug policy, health reform, and disability policy for American Prospect, tnr.com, and other news outlets. His essay, "Lessons from an Emergency Room Nightmare" was selected for the collection The Best American Medical Writing, 2009. He recently participated, with zero critical acclaim, in the University of Chicago's annual Latke-Hamentaschen debate.

19 thoughts on “Needed: Painful grand compromise in Illinois”

  1. Don't live in Illinois, obviously, so I don't know much about this subject, but is there a reason you don't include businesses in your list of who has to pony up more?

  2. I'm always curious about the statement that some group must accept less in pensions. Is it not correct to say that pension benefits are negotiated in lieu of increases in pay to match the wages of employees in other businesses? That Illinois can't afford the pension system is a measure of the mismanagement of that pension system by public servant – generally the failure to fund pensions that are contractually agreed upon. If that is true, then the state owes the public employee pension fund – this isn't some bonus paid out on a discretionary basis only when there are sufficient funds. If the state can simply reset the expectations for the pension fund, it would seem clear that no union should ever accept any form of delayed compensation – simply put, it may or may not be paid based on how corrupt the administration is.

    To state that public employees must accept some reduction in their pension then seems more like highway robbery. That the state hasn't got the money is too bad – it is their problem to find it, to fund these pension plans. On what basis would you have the pension plans re-negotiated? Seems to me that the pensioners should take the same attitude that the banks are taking when someone can't pay for a house that is now underwater.

    I am in California where the same issues are being dealt with – I have friends and relatives who have served the state (usually in education) for decades, and have taken less pay, in part because of the pension plans offered. If they are required to take significantly less – well it would seem that if one is competent, one should not work for the state. The statement that the state can't pay the pensions now has one answer – raise taxes and get the money.

  3. I think Brad is spot on, as they say. Of course a GOP response might be that we should deny civil servants access to collective bargaining. If Wal-Mart greeters can't enter into long term contracts with their employer, why should teachers, police officers, etc., be treated any differently.

    Admittedly it was at the federal level, but the Obama administration allowed the banks to pay out huge bonuses, i.e., delayed compensation. Why should middle class civil servants be treated worse than Wall Street?

  4. In Illinois,public employee salaries are on par with private sector salaries, and the job security (up until now) has been far greater.

  5. Harold

    My impression is that the high level of perceived corruption in public office in Illinois (and especially Cook County) has made the public utterly resistant to increases in taxation? The general impression is that the state only wastes its money on the schemes of crooked pols?

    In that chapter in Tom Vanderbilt's 'Traffic' about why Belgians break the road laws the conclusion is that it is about the very high levels of corruption/ bad governance in Belgium (v. France, Netherlands, Germany).

    Maybe the same effect in Illinois?

    Another issue of course is there's no incentive for political minorities to 'play ball'. Let the majority take the pain.

    Nick Rowe in Worthwhile Canadian Initiative had some very good posts about the 'Scandinavian solution' to public finance: high indirect, consumption related taxes, low capital taxes (consumers are not particularly mobile, companies are highly mobile).

    Might this be a way forward for Illinois? Ie higher sales and excise taxes?

    I realize higher gas taxes are an American political Third Rail, but when you read that the UK exchequer takes in £20bn pa from petrol duties and VAT on petrol….

  6. One thing I might add is that it should certainly be illegal, with criminal penalties on legislators, for Illinois to delay payment (where there is not dispute) more than, say, 90 days.

  7. Ohio Mom

    Business is highly mobile between jurisdictions. Raise business taxes, companies will move to Indiana, Ohio, Arizona, etc. One of the biggest problems in the 'rust belt' has been business (especially corporate HQs) relocating to the Sun Belt. The Midwest is suffering from long term loss of industry and of people to the Sun Belt, and you don't want to do anything to accelerate that– people will go where the jobs are.

    People are somewhat less mobile.

  8. It seems to me Ohio is going to have to accept that it will need to freeze current public pension fund benefits to members at the current level. Ie stop all accrual.

    Then everyone is re-enrolled into a new scheme with a 'defined contribution' or 'career average salary' type attributes.

    it might still be possible to preserve the defined benefit aspect up to say, 2/3rds of the average salary (so say 30k on 45k for someone with the full 35 years employment history with the state).

    Using a simple TIAA-CREF or Vanguard type system (low fees, broad index funds, predetermined 60/40 asset split) it should be possible to provide reasonable pensions for retired state civil servants.

    Ohio could undertake a special tax to make up the deficit in existing schemes in a pre agreed timetable. Eg an income tax surcharge for 5-10 years or a special addition to state sales tax.

  9. That Illinois can’t afford the pension system is a measure of the mismanagement of that pension system by public servant – generally the failure to fund pensions that are contractually agreed upon.

    Not if you are talking about changing what is agreed upon. I'm assuming that "renegotiate pensions" isn't for those who are already retired, but those who are still working–and doesn't apply to what's already earned, but to what will be earned in the future. It's perfectly acceptable, in general, to say that "this was the agreeement last year, but the agreement for this year is different."

  10. SamChevre – Your statement is correct – I let some of the questions here in CA enter into my comment. There is good evidence that the state is not going to be able to pay current pensions for state employees. Perhaps IL is different and has no plan to change current or previous contracts. But, why do I find myself not believing that. The 13 Bn shortfall is a problem now, (as is 29 Bn in CA). It is current pension payments that would need to be modified – indeed, if the state could go bankrupt (current law forbids it – but I have no idea what happens in default then), that would cancel the pension agreements.

    EB I can accept that in IL the salaries are on a par with private industry. That doesn't change the contractual relationship that the employees and retirees have with regard to the pension. Pensions are delayed compensation. If they are not to be paid, I would think that one's interest in agreeing to delayed compensation goes to zero. It is true that some pensions in CA are out of whack (certain police departments and prison guards). Salaries for teachers are not out of whack, but are lower here than equivalent private industry employ. Are salaries for teacher's really better in IL? I sort of doubt it.

  11. My Illinois pension is based on my thirty-year-long contribution of ~8% of my salary, and the state's promise to match it — which of course it hasn't for some time now. Illinois chose to opt out of Social Security (where they would have been required to put in funds, as must every private employer) and instead put in enough to cover outlays. In other words, the Illinois legislators chose to use the pension system as their own piggy bank. A private employer who had done that would face charges of embezzlement.

    The "unsustainable retirement arrangements" that Harold refers to are not due to overly generous pensions, but to legislators who deliberately chose to mismanage the state's affairs, assuming that economic growth would pull them (and us) out of the hole they dug.

  12. Regarding private pay scales versus public pay scales: I teach at a low-income public school. There is no private sector version of my job!!! Do we compare pay of the those in combat? How about policemen or firefighters? Or maybe prison guards? There are aspects of these jobs built into the salary rate that simply don't exist in other places.

  13. Eli

    (if you read one of my earlier comments it's obvious that I thought 'Illinois' and wrote Ohio, after my replay to Ohio Mom– mea culpa).

    You could outsource public school teaching to private companies.

    My guess would be salaries would go up, but teachers would operate without tenure of any form, and pensions would be minimal and defined contribution. Like the private v. the public sector generally (higher salaries, for those with specific and demanded skills, but lower security of tenure and fewer 'deferred' benefits).

    You'd get much higher turnover of teachers.

    I suspect much state education will go that way.

    We've already seen, in the UK, 'academy schools' which are state schools run by private foundations and companies. And for profit firefighting companies. Prison guarding has been taken over by the private sector.

    Thinking back to Mrs. Thatcher, we are usually a testbed for radical theories of privatisation.

  14. Eli

    Just on combat troops, the US and UK do outsource a lot of combat functions in Iraq and Afghanistan to private ocntractors.

    And Blackwater pays up to $200k pa for a bodyguard. So that is a measure of the risk premium paid.

    South Africans and Nepalese Ghurkas have been widely used on much lower premiums- I am guessing but $30k pa for a Ghurka? Probably more Nepalese bodyguards have died than British and American.

    All of these troops were originally trained though either by the South African state under apartheid, or perhaps by the British and Indian governments via their Ghurka regiments.

    it turns out making war privately is possible, but it's damned expensive. Might not work for full scale combat.

    Vt

  15. VT, it's very difficult to come up with comparisons.

    First, a private school financed by private money is very different than a private school financed by public money. Public schools are subject to different requirements, mainly in that they are expected to serve a public good. Yet this is what makes them so much more difficult to run: they must accept any and all students, turning away no one. This creates a very different school environment. To make a proper comparison, we'd need to find private schools operating in similar neighborhoods, with similar populations, etc. One of the biggest problems with charter comparisons is that they generally operate by lottery, can expel students for poor performance, and so selection is built in. This creates a very different population. And of course, these are not schools in the private market anyway. Neither are there firefighting or police jobs that have the same responsibility to the public.

    One of the problems with the public sector is that because of their obligation to the "public good", they are forced to take on inefficiencies. Businesses can scale their prices and services according to cost. So for instance if I ran a private school, and was asked to serve an at-risk population which required extra services and support in order to achieve similar results, I would simply charge more, then scale my services accordingly. I certainly couldn't offer my teachers the same pay without making structural changes, as those up the street who serve well-prepared, high-functioning students and have a much easier job – unless I could depend on a sense of moral obligation from my staff, in that they might sacrifice for the good of the children.

    I think that's what you see with private military contractors. Americans troops are fighting for their country, so there's a lot of sacrifice. And that's factored into their pay. When you go private, the pay goes way up. I actually find this rather sad, in the sense that again, we aren't really paying people for their sacrifice.

    That's the real point I guess was driving at. There's often a lot of sacrifice in public sector work that is or isn't reflected in the cost – sacrifice that either wouldn't exist, or if it did would have to be factored into compensation. In the end, our mixed-economy approach generally has the government do things that private market can't – providing equal access to parks, roads, health care, libraries, schools, etc. And to the extent that they can do these things, they can only do so with public funding, and within regulations. Police officers are required to patrol *all* city streets, not just those who pay more.

    As for unions, that's just a function of an organizable labor force. There will always be large numbers of police, firefighters, teachers, janitors, prison guards, etc. who will have an interest in representation. We can get into whether unions are good or bad, but that's less about public vs. private and more about workplace rights, etc.

  16. Eli

    I don't disagree with your analysis at all.

    However I can tell you what has happened in the UK: Academy Schools (brought in by a Labour Government)– that's private entities running state schools. Private security companies running prisons. And with the latest firefighter's strike, private firefighting companies.

    Our bus companies are also all privatised.

    Generally unions here are weaker and less well organised in the private sector.

    So it's coming. And yes, all the problems of the private sector 'dumping' problem cases back on the public sector.

    But to show 'value for money' the local councils are being forced to it by the central government.

    If it can be done here, it can be done in America.

    We are the apostles of radical privatisation.

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