The State of Illinois is virtually bankrupt. Through its general revenue fund and other funds at its control, the State takes in about $30 Billion per year, in a good year. The hole in its budget this fiscal year - FY2010 (ending June 30, 2010) - is in the range of $14-15 Billion.
The short-term consequence of the State's fiscal crisis is that it has run out of money and cannot pay its bills, or meet its obligations. As a result, our State's health care providers are not being paid on a timely basis - our hospitals, our doctors, our clinics. Our elementary and high schools have not received money which has been promised from the State. Our universities and community colleges are suffering. Our social service agencies throughout the State - the organizations that deal with the aged, the sick, the disabled, and the poor - are seeing their funding slashed.
The long-term consequences are potentially far worse. Over the past dozen years, the State has piled up huge unfunded obligations - arising out of its pension and retiree health care plans for State workers. Our unfunded pension obligations today - underscore UNFUNDED - are in the range of $76 Billion. Add another $13.5 Billion or so of pension bonds and notes, which the State must repay. Add another $40 Billion or more in obligations to pay the future health care costs of the State's retired workers. The total is in the range of $130 Billion, more than $25,000 per Illinois household. This retirement-related debt makes up most of the State's cumulative debt outstanding.
Why are these unfunded pension costs so large?
Several reasons. One is that the State's pension systems are very generous by private-sector standards. State workers can retire with full pensions at 60 or 55, depending on which plan they are in. (Chicago workers can retire at 50.)
The unfunded retiree health care obligations are likewise enormous. The State has not even attempted to fund these. When employees retire from State government, they receive "gold plated" health insurance coverage - they can go to any doctor, for any procedure, at any time. No managed care.
Why should people in the State care? We have had budget problems before, and we always got through them somehow. Won't that happen again?
The problem today is the huge retirement-related debt of $130 Billion - and the fact that it is growing so rapidly. The pension debt alone increased from about $14 Billion in 1998 to around $88 Billion by the end of FY2009.
As the debt grows, so does the annual funding requirement. If we don't get control of this quickly, the funding requirement for the pensions and retiree health care obligations will crowd out other vital areas of the State's budget. The result will inevitably be twofold: (a) massive cuts in other areas of the State's budget, and (b) pressures for huge tax increases.
The pension reform bill recently passed by the General Assembly does not go far enough, because it applies to future hires only. It does not reduce the $130 Billion of retirement-related debt. It still leaves current State workers with far more generous and costly future pension accruals than those available to most Illinois taxpayers.
What should be done?
Various groups have called for essentially the same remedies. These include the Civic Committee of the Commercial Club of Chicago, the Taxpayers' Federation, the Civic Federation, and others. The needed steps are: (1) serious cuts in the State's budget; (2) reform of the State's pension system - bringing benefits into line with those available in the private sector; and (3) reform of the State's retiree health care system. These three steps could save the State billions of dollars each year.
Reform of the State's pension system offers the largest potential relief for the State's budget. Any reform must protect the vested contract rights that retirees and workers have earned for past service. But it must also - prospectively - put in place retirement plans for future service that are less costly than current plans, and more in line with the level of benefits available in the private sector. There are two reasons this must be done: First, it is fair. State workers should not receive retirement benefits far more generous than those available to most taxpayers. Second, the State cannot afford to continue the current plans into the future. The Illinois Constitution guarantees the contract rights earned by State workers for past and present services - and those rights must be protected. But nothing in the Constitution says that the pension arrangements cannot be changed prospectively, for future services - just as has happened in the private sector.
If Illinois does not cut its costs, achieve real pension and retiree health care reform, and balance its annual budgets, we may soon pass the "tipping point" beyond which no combination of drastic budget cuts or huge tax increases will be sufficient to avoid collapse - or prevent people, investment, businesses, and jobs from leaving the State.
Dealing with these budget problems now will be painful. Putting them off to future years will increase the pain - and the burden - and the taxes.
Let's start now.