City Club 2013January 28, 2013

2011• State Budget

2012• Pensions

2013• The State Budget and the Pension Solution

Points of Discussion

1. How the state budget works2. Where we spend our money3. What we have done to tackle

budget pressures4. How we can solve the pension crisis

FY13: All Funds Budget$66 Billion

$33.7 bil-lion51%

$24.1 billion 37%

$8.2 billion12%

General Revenue Funds Other State FundsFederal Funds

Top 15 Other State Fund Balances in FY13$1.254 billion total

Bank and Trust Company Fund$28.2

Downstate Public Transporta-tion $47.4

Downstate Transit Improvement$47.3

Hospital Provider Fund$128.8

Insurance Financial Regulation Fund$34.6Insurance Producer Administration Fund

$37.8Open Space Land Acquisition and Development

Fund$47.3

Personal Property Tax re-placement Fund

$312.5

Real Estate License Administra-tion Fund

$32.4

Secretary of State ID & Theft Prevention

$30.2

State and Local Sales Tax Re-form$74.3

State Lottery $160.7

Supplemental Low-Income Energy Assistance Fund$106.9

Vehicle Inspection$31.90

Water Revolving Fund$133.2

$ in Millions

Projected FY13 balances of ALL Other State Funds: $1.995 billion

Top 15 balances account for 62.8%

FY13: All Funds Budget$66 Billion

$33.7 bil-lion51%

$24.1 billion 37%

$8.2 billion12%

General Revenue Funds Other State FundsFederal Funds

Personal Income Tax

46.0%

Corporate Income Tax 6.3%Sales Tax

19.7%

Other Taxes and Fees

13.8%

Federal Receipts 14.1%

Personal Income Tax - $15.3b

Corporate Income Tax - $2.4b

Sales Tax - $7.3b

Other Taxes and Fees- $4.7b

Federal Receipts - $3.9b

FY13 General Revenue Funds By Source

$33.719 Billion

Illinois Tax History1969

Gov. Ogilvie creates State Income Tax• 2.5%

Personal• 4.0%

Corporate

1983

Gov. Thompson raises rates by 20% for one year• 3.0%

Personal• 4.8%

Corporate

July 1, 1984

Rates return to previous level• 2.5% Personal• 4.0% Corporate

1989

Gov. Thompson approves another temporary tax increase through 1993• 3.0% Personal• 4.8%

Corporate

July 1,1993

Gov. Edgar makes tax increase permanent• 3.0%

Personal• 4.8%

Corporate

January 1, 2011

Gov. Quinn approves a temporary tax increase• 5.0%

Personal• 7.0%

Corporate

$0 $50,000 $100,000 $150,000 $200,000 $250,000 $300,0000%

1%

2%

3%

4%

5%

6%

7%

8%

9%

10%

Personal Income Tax Rates of Midwestern States

Illinois

Missouri

Kentucky

Indiana

Wisconsin

Iowa

Illinois - 2015

Income (Married Filing Jointly)*Indiana's tax rate includes an average county tax rate of 1.28%

Tax

Rat

e

Illinois Kentucky Missouri Indiana Wisconsin Iowa0.00%

2.00%

4.00%

6.00%

8.00%

10.00%

12.00%

14.00%

7.00%6.00% 6.25%

8.00% 7.90%

12.00%

Top Corporate Income Tax Rates of Midwestern States

Inco

me

Tax

Rat

e

Private Sector Job Growth by Percentage After the Tax Increase

IL IN WI OH NJ

-0.5%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

1.9%

2.9%

-0.2%

3.3%

1.7%

Jan 11 - Nov 12

Illinois gains 91.8 thousand

jobs

Wisconsin loses 5.6 thousand

jobs

FY13 General Revenue Fund Budget: $33.719 Billion

Non-Discretionary

Spending:$17.3 billion

Discretionary Spending:

$16.4 billion

Government Services 3.5%Public Safety and Regulation

4.8%

Human Services15.2%

P-1219.5%

Higher Ed5.9%

Medicaid/Healthcare23.3%

Pensions15.2%

Debt Service on Pension Bonds

4.6%

Debt Service on Capital Bonds

1.8%Statutory Transfers Out

6.1%

FY 2013 General Revenue Fund BudgetDiscretionary and Non-Discretionary Appropria-

tions$33.719 Billion

Government Services - $1,164Public Safety and Regulation - $1,607Human Services - $5,086P- 12 - $6,542Higher Ed - $1,980Medicaid/Healthcare - $7,810Pensions - $5,100Debt Service on Pension Bonds - $1,552Debt Service on Capital Bonds - $616Statutory Transfers Out¹ - $2,052

Operation of State Gov-ernment: $3.9 billion (11.5%)

$ below in millions

Pensions Total: 19.8%

FY 12 Actual FY 13 As Passed FY13 vs. FY12

Revenues: $33,324,000,000 $33,719,000,000 $395,000,000

Non-Discretionary Expenditures    Pensions $4,141,040,680 $5,100,000,000 $958,959,320

Group Insurance $1,435,531,900 $1,171,000,000 ($264,531,900)

Debt Service $2,137,000,000 $2,168,000,000 $31,000,000 Transfers Out of GRF Like Subsidies for

Local Governments $2,398,662,000 $2,052,200,000

($346,462,000)Medicaid $6,638,953,200 $6,638,953,200 $0

Pay Old Bills $302,000,000 $1,300,000,000 $998,000,000

Medicaid Match on Old Bills ($151,000,000) ($500,000,000)($349,000,000)

Permanent Lapse ($802,000,000) ($650,000,000) $152,000,000

difference: $1,179,965,420

Non-Discretionary Expenditures: FY12 vs. FY13

The “SMART Act”(Saving Medicaid Access and Resources Together)

The SMART ACT is a comprehensive , $2.4 billion package of cuts, revenues, utilization controls, provider rate changes, and anti-fraud measures designed to slim down and promote efficiency in Medicaid while preserving access and quality of care.

“Scrubs the rolls” to remove ineligible clients•$360 million in savings

Reduces optional Medicaid services•$1 billion in savings

2.7% - 3.5% rate cut for certain providers•$240 million in savings

Strengthens

provisions against provider and

client fraud

New payment systems for

hospitals and nursing homes

$1.6 billion in total savings

SMART ACT: New Revenue• The tax on cigarettes will be increased by $1

per pack; taxes on other tobacco products will be doubled.

• Smoking-related conditions are the cause of at least $1.4 billion in Medicaid spending each year.

• The tobacco tax is projected to generate $350 million per year in federally match-able revenue; $50 million from the enhanced hospital assessment tax will be matched, for a total of $800 million in state and federal funds.

Federal Match

•$400 million

Tobacco tax

•$350 million

Hospital

Assessment•$50 million

The American Lung Association predicts the new tax will persuade 59,400 smokers to quit and 77,600

youths not to start smoking.

Discretionary Expenditures: FY12 vs. FY13

FY 12 Actual FY 13 As Passed FY13 vs. FY12

Revenues: $33,324,000,000 $33,719,000,000 $395,000,000

Discretionary Expenditures      

Human Services $5,286,218,914 $5,085,945,980 ($200,272,934)

Public Safety $1,714,706,151 $1,662,900,200 ($51,805,951)

General Services $1,242,075,211 $1,165,014,734 ($77,060,477)

K-12 Education $6,751,429,955 $6,541,837,830 ($209,592,125)

Higher Ed $2,092,410,002 $1,979,809,800 ($112,600,202)

difference: ($651,331,689)

FY13: Budget Accomplishments

• Balanced• Dedicates revenue to paying old bills• Makes the pension payment• Cuts discretionary spending as a

means to meet spending pressures• Hold Medicaid spending flat through

cost controls and other measures

Education and Pension Funding

FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY 13$0.0

$1,000.0

$2,000.0

$3,000.0

$4,000.0

$5,000.0

$6,000.0

$7,000.0

$8,000.0

0%

5%

10%

15%

20%

25%

30%

GRF Contribution Contribution as % of Total GRF

GRF P-12 Expenditures as % of Total GRF Expenditures($ in millions)

Lottery Contribution Local, State, Federal Share$0

$5,000,000,000

$10,000,000,000

$15,000,000,000

$20,000,000,000

$25,000,000,000

$30,000,000,000

$35,000,000,000

$40,000,000,000

$45,000,000,000

$600,000,0001.63%

$36,300,000,000 98.37%

P-20 Education Funding:State, Local and Federal

FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY 13$0.0

$1.0

$2.0

$3.0

$4.0

$5.0

$6.0

$7.0

$8.0

$5.8$6.1

$6.5

$7.1$7.4 $7.3

$7.1$6.8

$6.5

$1.3

$0.8$1.2

$1.6

$2.2

$3.5$3.7

$4.1

$5.1

GRF Spending HistoryP-12 Education Funding vs. State Pension Contribu-

tions$ in billions

P-12 Education Funding Pension Contribution

A Look at the Upcoming Pension Payment

$ whole numbers

GRF Pension Certification

System FY13 FY14Increase Over

FY13       SERS $1,041,371,800 $1,097,360,220 $55,988,420 JRS $88,210,000 $126,808,000 $38,598,000 GARS $14,150,000 $13,856,000 ($294,000)SURS $1,252,800,000 $1,509,766,000 $106,966,000 TRS $2,702,278,000 $3,438,000,000 $735,722,000 Subtotal $5,098,809,800 $6,185,790,220 $1,086,980,420

Recent Pension Reform

2010

2012

2014

2016

2018

2020

2022

2024

2026

2028

2030

2032

2034

2036

2038

2040

2042

2044

$0.0

$5,000.0

$10,000.0

$15,000.0

$20,000.0

$25,000.0

$30,000.0

Required State Pension Contributions ($ in millions)

Baseline State ContributionSB 1946 State Contribution

•Reforms pension benefits for all public pension systems •Increases the retirement age to 67 •Ends the 3% annual cost of living adjustment for (future) retirees•Requires that a retiree’s benefit be calculated over an 8 year period. •Establishes a cap to final average salary that mirrors Social Security.

SB 1946 is estimated to reduce required State contributions by $71.1 billion.

SB 1946 is estimated to reduce the Systems' total liability by over $250 billion through 2045. (COGFA)

Pension Clause: Article XIII, Section 5 of the Illinois Constitution

“Membership in any pension or retirement system of the State, any unit of local government or school district, or any agency or instrumental thereof, shall be an enforceable contractual relationship, the benefits of which shall not be diminished or impaired.”

(Article XIII, Section 5 of the Illinois Constitution)

Pension Clause: Article XIII, Section 5 of the Illinois Constitution

• The pension clause makes a public employee’s pension an enforceable contractual relationship which cannot be unilaterally changed by the legislature

• Therefore, pension benefits are contractual and can be modified through contract principles of offer, consideration, and acceptance

Cost of Living Comparison

60 61 62 63 64 65 66 67 68 69 70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90$50,000

$60,000

$70,000

$80,000

$90,000

$100,000

$110,000

$120,000

$130,000

$121,363

$95,000

State Employee Retiree Starting with a $50,000 Annuity

3% Compounded

3% Simple

Age

Under current law, a SERS employee who retires at age 60 can receive a compounded COLA. The compounding factor entitles the retiree to $252,633 in additional benefits that would not accumulate were the COLA non-compounded.

Senate Bill 1A Top Priority

Part A

• Part A of the bill is the pension proposal offered by House Leader Tom Cross and Rep. Elaine Nekritz in early January, 2013

• The proposal would unilaterally reduce the pension benefits of current employees and retirees

• Specifically, the existing 3% compounded COLA would be replaced with a COLA of no more than $600 or $750, depending on whether the person receives Social Security

Part A

• Also, no one would receive a COLA until after January 1, 2017

• Employees would need to contribute an additional 2% of salary to the pension system.

• Finally, pensions could only be based on salaries below Social Security’s wage base (currently $113,000)

Part B

• Part B is the proposal negotiated by the Governor and four caucuses last spring, and uses a contract approach to change pension benefits

• The Senate passed a version of this proposal for two of the state’s five pension systems (SERS and GARS) twice last year

Part B

Part B asks employees and retirees to make one of two

choices:

Part B: Choice 1• Agree to a lower 3% simple COLA,

delayed five years, instead of the current 3% compounded COLA

• Receive access to the state’s retiree healthcare program

• See future salary increases counted for pension purposes

Part B: Choice 2• Reject the offer and keep the current 3%

compounded COLA• Lose access to the state’s retiree

healthcare program• Any future salary increases will not be

counted for pension purposes

Part B: Savings

• Reduce the $309 billion the state is estimated to contribute to the pension system over the next 30 years by $66 billion to $88 billion

• Reduce current unfunded liabilities by up to $17 billion immediately

So there you have it

1. How the state budget works2. Where we spend our money3. What we’ve done to tackle budget

pressures4. How we can solve the pension crisis

www.IllinoisSenateDemocrats.com