1. Forum on Fiscal Integrity August 3rd, 2010 J. Thomas Johnson, President Taxpayers’ Federation of Illinois (217) 522-6818 tom@iltaxwatch.org Illinois Fiscal Crisis

2. The Illinois is Broke Campaign

3. Illinois is Facing a Financial Crisis FY2011 Cumulative Debt: $160 BILLION

4. More than 80% of Illinois’ debt is retirement obligations related to State workers * Unfunded pension obligations * Pension notes and bonds * Unfunded retiree health care obligations FY2011 Cumulative Retirement Obligations: $130+ BILLION Burden of Retirement Obligations

5. Illinois is the Worst in the Nation Source: “The Trillion Dollar Gap Underfunded State Retirement Systems and the Roads to Reform,” The Pew Center on the States, February 2010

6. 6 State Unfunded Pension Liability and Pension Obligation Bonds

7. 7 * Required payments were reduced by legislation for FY2006 & 2007. + Estimate # Assumes 3.5% growth rate in tax collections Source: Own-source revenue estimates from Taxpayers’ Federation of Illinois; pension contributions and POB payments from various reports of the Commission on Government Forecasting and Accountability. Required Pension Payments as a Percentage of Big Three State Taxes (Individual and Corporate Income and Sales Taxes)

8. State retirement plans for current employees are too expensive. Retirement age of 55 (after 30 years of service) Pension guarantees of up to 80% of salary (with sufficient years of service) Automatic cost of living increases 100% subsidy of health care premiums (after 20 years of service) for state employees A Plan Illinois Cannot Afford

9. 97% of plans set retirement at age 65 Cost of living adjustments are virtually non-existent Private Sector Pension Benefits: Dramatically Different Source: Hewitt Associates, LLC database of large employer plan specifications, covering over 1,000 major employers and including 80% of Fortune 500 2009

10. Source: Kaiser/Hewitt 2006 Survey on Retiree Health Benefits, December 2006; “State of Illinois Employee Health Insurance Plans: Analysis and Recommendations for Cost Containment,” Civic Federation, April 2007. Private Sector Retiree Health Care: More Cost-Sharing 90% of private sector retirees pay part of their health care premiums. More than 90% of Illinois state retirees pay 0% of their health care premiums. (Teachers participate in a different plan that requires them to pay part of their premiums.)

11. In April, Governor Quinn signed legislation to change benefits for future employees: Raising retirement age to 67 Adjusting cost of living increases Preventing “double-dipping” Problem: Illinois won’t realize real cost savings for years. First Steps in the Right Direction

12. The Operating Budget and The Structural Deficit 12

13. General Funds Cumulative Deficit $32 Billion Spending Base (Billions) 13 Acknowledged TFI * 2008 or Prior$.9 $.9 2009 2.8 3.2 2010 2.2 2.8 Total$ 5.9 $ 6.9 2010 Pension Obligation Bonds $3.5 Federal Stimulus through 2010 $3.4 *Inclusion of Refund Fund Deficit

14. Total: $4,712 million Source: Illinois Office of the Comptroller State of Illinois, Backlog of Unpaid Bills as of June 30, 2010 (in $ millions)

15. Fiscal Year 2011-Budget Deficit Cash (Billions) Proposed by Governor$4.7 Spending Reductions Included in Budget 2.0 Acknowledged 2011 Structural Deficit $6.7 Refund Fund Shortfall.4 $7.1 15

16. Proposed Funding Sources for 2011 Deficit Cash (Billions) Inter-Fund Borrowing$1.0 Securitization of Tobacco Settlement 1.2 Pension Borrowings 4.1 Amnesty.3 Refund Fund – Borrowings.4 Total$7.0 16

17. Accumulated Deficit Cash (Billions) 17 Acknowledged TFI 2010 Accumulated Deficit $ 5.9 $ 6.9 2011 Structural Deficit 6.7 7.1 Total Accumulated Deficit $ 12.6 $ 14.0

18. Accrual View of Structural Deficit (Billions) 2011 Structural Deficit $7.1 Unfunded portion of Interest on Pension Debt 4.7 Unfunded Interest on Retirement Healthcare Benefit 2.2 $15.0 18

19. Potential 2012 Structural Deficit Cash (Billions) 2011 Structural Deficit $7.1 Eliminate Remaining Federal Stabilization Funds.9 Repay Interfund Borrowing 1.0 $9.0 Revenue Growth from Base 1.0 $8.0 Potential Spending Growth ? 19

20. Big Three Taxes (Personal, Corporate Income Taxes & Sales Taxes) $ Billions 20 Actual or Historical Growth ProjectedRate 2008$19.4$19.4 2009 17.7 20.2 2010 16.0 21.0 Projected 2011 16.5 21.9 $69.6 $82.5 Difference $12.9

21. 21 “Big Three” Tax Revenue Since 2000 (individual and corporate income and sales taxes) $ Billions *estimate Source: COGFA % ChangeN/AN/C-4.7-1.4+9.2+1.9+8.9+7.0+6.0-8.8-9.7+2.5

22. Potential Budget Cuts $ Billions K-12 Education $7.3 billion General State Aid$4.5 billion Reduce Foundation Level 20%.6 Reduce Poverty Grant20%.2 Reduce Double Whammy Property Tax Relief 50%.4 Special Education $1.4 billion Reduce 25%.35 Other Categoricals (Early Childhood, Transportation, etc) $1.4 billion Reduce 25%.35 Higher Education $2.2 billion Reduce Support for State Universities 20%.3 Reduce Tuition Scholarships 20%.08 Reduce Community College Support 20%.08 22

23. Potential Budget Cuts $ Billions Medicaid General Revenue $9 billion Cut utilization of hospitals, eliminate non-core programs, increased generic drugs 10% savings*.7 Human Services $5.5 billion Discontinue Non Corp Grants - Departments of Human Services, Public Health, Aging, DCEO, Agriculture.4 Human Services – Human Capital Development Rationalization.1 Corrections and Juvenile Justice $1.2 billion Reduce Minimum Security-Drug offenses 12% reduction.15 *Reductions only reduce state deficit by 40%, during stimulus, 50% thereafter, requiring gross – up of these numbers 23

24. Potential Budget Cuts $ Billions Employee/Retiree Healthcare $1.8 billion Eliminate PPO—all HMO.15 Retirees—25% premium.15 Pension Reform $4.0 billion going on $5.2 billion New employees only 0 Freeze existing employees at current salaries 1.0 24

25. Potential Budget Cuts $ Billions Mass Transit Operating Support $.5 billion Reduce 20%.1 Local Government Revenue Sharing $3 billion Reduce 10%.3 Fund the Following out of Road Funds & Increased Fees.4 State Police Secretary of State Total Cuts $ 5.8 25

26. Tax Changes That Could be Considered Income Tax $ Billion Tax Retirement Income 1.0 For those under 65.6 In Excess of $50,000 plus Federal Exempt Social Security.7 In Excess of $100,000.3 Eliminate 5% Property Tax Credit.5 Increase Personal Income Tax Rate 1%* 3.0 Increase Corporate Income Tax 1%*.3 Net Increase $4.8 *Currently, 10% is distributed to counties & cities. 26

27. Tax Changes That Could be Considered Sales/Excise Taxes $Billion Reimpose Sales Tax on Food (exempt prescription drugs) 1.0 Eliminate Exemption for Exempt Organizations.5 Sales Tax on Services – at current 5% state rate* All Services 7.3 All Services excluding Business to Business (BtoB) 3.6 All Services excluding BtoB and Medical 2.8 Lower Overall Tax Rate by 1% Food & Drug & All Services Food & Drug & All Services excluding BtoB Food & Drug & All Services excluding BtoB and Medical *In addition, cities and counties’ tax base would be expanded generating 50% of the state revenue estimate. 27

28. Tax Changes That Could be Considered Other Excise Taxes $ Billion Cigarette Taxes Increase Tax $1 per pack (currently $.98).4 Utilities Taxes Increase rates 10%.1 Gaming More Boats/More Positions ? Video Gaming at Tracks.1 ? ? ? Gross Increase $4.5 – 8.8 Net Increase $3.1 – 5.9 28