Illinois: Your Perpetual Host of the Hunger Games

A state income tax hike is inevitable.

There, I said it. Regardless of the outcome on the budget impasse, there is no getting around it. The state’s gun barrel is pointed squarely at the wallet in your left buttocks pocket, the state’s sadistic version of a million dollar wound where they keep the money but we get the bowl of ice cream. I’d be pleasantly surprised if we got out of this at 4.5%. The only question now is if it will be retro-active to 1/1/16. The state has plans for that extra money <insert flushing sound here> and it probably doesn’t involve you. Or your children. And speaking of the children…

About a year ago, I wrote a story demonstrating the impact of that tax hike on a middle class family as they attempted to save for their child’s future. It was a basic exercise – using the same rules and assumptions our state pension systems use – to demonstrate how a seemingly small, innocuous tax hike (well, innocuous to those levying the tax or whose salaries are derived from tax revenue) has huge ramifications for a child down the road. How extra taxes today lead to less money for college savings accounts…which leads to expensive student loans…which leads to drawn-out student loan payments that could otherwise be invested towards a retirement fund…which leads to a vulnerable retirement, a lifetime of difficult financial situations, and foregone opportunities a solid financial foundation affords oneself. In total, if that 5% tax rate were to remain in effect as I wrote, would cost that child $1,500,000 at the time of his retirement. Surely, even decades from now, $1.5 million will offer some security blanket. Or maybe it won’t be enough to cover the cost of all those low-quality cotton purple and green T-shirts for the AFSCME-SEIU company picnic in 2070. Who knows…

So I thought I’d revisit that same exercise based on the today’s tax rate of 3.75% and a predicted 4.75% for the (near) future. And while the amount of lost savings does decrease slightly, the amount of foregone savings still remains a substantial sum of money that will impact numerous decisions over the course of your child’s lifetime. And that no one really cares.

That’s an important concept to understand…no one is truly advocating for your children’s financial future. That’s not to say there are no “children advocates” in Illinois. While organizations such as Voices for Illinois Children, Illinois Action for Children, 30 Children to Mars (OK, I made that one up) advocate for more resources for disadvantaged children today, the impact of tax hikes on the college and retirement funds of tomorrow aren’t exactly part of their mission statements. I don’t fault these organizations appealing for more funds, but it doesn’t mean we should ignore some important facts. In perusing the tax forms filed by these not-for-profits, you’ll see plenty of 6-figure incomes in the speaking-and-acting-for-children industry, and one that tops $300,000. No one ever said advocacy doesn’t pay. Putting the profit back into not-for-profit, I suppose. You would think, amidst an unprecedented budget stalemate, the captains of children advocacy would offer up a cap on their own wages. You know, for the children. Because when the folks running and working for not-for-profits request higher taxes yet have earnings that eclipse the median income in the state, the taxpayers have a right to ask.

The state universities certainly don’t care about your children’s finances. Take a look at University of Illinois Champaign-Urbana’s enrollment figures. Back in 1985, only 15% of UIUC’s student population came from out-of-state. In 2015, non-resident enrollment is up to 38%! Over that 30 year time frame, Illinois gained 1.2 million residents and overall enrollment at UIUC increased 25%. Yet UIUC enrolls 3,000 less Illinois residents today than in 1985. Does this sound like an institution invested in our children’s future? Now, I’m sure the board of trustees – emerging from the dense, expensive administrative fog that enshrouds each university, donning sound-deafening headphones, lest the sound of the inevitable higher education bubble bursting catches them aflutter – will argue that an ever decreasing amount of state funding has played a part in this discrepancy. Their argument to keep tuition costs low is more revenue (taxes). But if that revenue comes at the expense of your ability to save for your child’s college savings, your kid is no better off financially. Additionally, your kid’s out-of-state options become much more expensive, making them an “indentured student” of the state university system, so to speak. And all of this just so the Fighting Illini can enroll more students from…China? Yes, the true irony here is that the state’s most prestigious public university – in a move cribbed from Wal-Mart’s playbook – not only increasingly outsources its student population, but turns to pollution-choked China to ensure its quad is packed with the most profitable students possible, taxpaying residents be damned. What would Marcus Liberty do?

Even if your child does manage to safely navigate the tempestuous waters of administratively-heavy advocacy groups and universities with a few bucks left in their pockets, what awaits them on the war-torn beach is the Panzer tank equivalent of child embezzlement – pension debt. And that beach is absolutely littered with ticking time bombs hidden in the sand below our children’s feet, such as…

The Cook County Pension Fund: $6.5 billion underwater, or a mere 5 record-setting Powerball jaCCPFckpots away from solvency.  Tucked away on page 22 is a Projected Member Count chart (see right) that shows, by the year 2025, there will be 2 inactive members (retirees) for every 1 active member (current employee). Surely, a severely under-funded pension system that is extremely reliant on incoming contributions will be fine when the number of retirees withdrawing funds is DOUBLE the amount of employees contributing, right?!  Et tu, Toni?

Tick, tick tick…

The combined debt from the 5 Illinois state pension systems is $112 billion, or a mere 0.9% of the cost of Bernie Sanders’ health care plan. Here’s an excerpt from my interview with their consolidated pension report: When will each of the 5 pension systems be fully funded? 30 years. That long, huh? OK, but it’ll be fully funded then, right? No, 90%. So we’re only paying out 90% of each pension? No, 100%. OK, but it won’t cost much, right? Only 40% of payroll each year for 30 years. Hmm, not sure I’d say “only”. But it’s all 5 pensions systems, right? No, the judges and legislators will require nearly 80% and 200% of payroll, respectively. Wow, that’s pretty steep. For 30 years?! That’s what I said. But at least you’re no longer assuming unrealistic 8% annual rates of return anymore, right? Correct. That’s good. So you’re assuming a more conservative and realistic 4-6% now? No, 7-7.5%. Oh, I see that now. And here you say that mere 0.5% rate reduction was the main cause for a $7.1 billion INCREASE in the unfunded pension liability in one year? You read that right, dear. Don’t call me dear. Isn’t $7.1 billion about the equivalent of 20% of the state’s revenue for one year? Not my department. Sorry. But considering the significant impact of such a small change, do you think your assumptions are wise over the long-term? I’m a report, not an op-ed piece. Fair enough. At least you’re not using the controversial pension smoothing method in your calculations anymore, right? Smooth as silk, baby. Can I go now?!

Tick, tick tick…

…Healthcare! Get your healthcare here! Get your state retiree healthcare here! Constitutionally-protected, must-pay-at-all-costs, yet completely unfunded state retiree healthcare here! Only $56 billion! Get your healthcare here…

Tick, tick tick…

Tier 2 pensions are projected to save the state billions in pension obligations over the next few decades. Tier 2 pension rules are part of the calculation used when determining the state’s overall pension obligations. Tier 2 pensions are also projected to run afoul of the Social Security Administration’s “Safe Harbor” rules and not meet the minimum standard for retirement income, thereby costing school districts untold millions as they will be forced to pay Social Security benefits on top of pension benefits. This risk is neither mentioned nor quantified in any pension financial report.

Tick, tick tick…

Recently, the Teachers Retirement System spun an incredibly naive yarn on the utopian society created by their teacher pension dollars and the resulting economic “stimulus” it adds to the state. For the moment, put aside the inconvenient fact that this report completely ignores the opportunity cost or economic impact of spending the money allocated to pensions on…oh, I don’t know…ANYTHING ELSE. Can’t we apply the same logic to our children’s retirement funds? Wouldn’t their 401(k)’s stimulate the economy in the same way? But if tax hikes are pilfering the early sources of that retirement fund (remember my example above), how do we expect our kids’ retirements, or lack thereof, to have the same economical impact? And if the answer is to make cuts in our family budget elsewhere, doesn’t that undermine their argument as to how consumer dollars stimulate the economy to begin with?

So our kids battle it out in a veritable financial Hunger Games as the politicos pick the haves, the have-nots, and the not-really-haves-but-you-are-now-because-we-ran-out-of-haves, ensuring all children emerge from the bloodbath traumatized in some fashion. And years down the road, as the Game’s survivors creep towards old age, a new batch of ignorant politicos will undoubtedly ask them, “Why didn’t you save enough for retirement?!”

The tax hike looms overhead, and while I cannot help you in that regard, I can warn you that this hike will not stop the charlatans from continuing to approach your front door and attempt to extract more money from your children. So here’s some advice: When the salesman ringing your doorbell attempts to sell you on pension debt re-amortization, just know all he is selling is a plan to ensure your children’s children will pay a much larger bill for services rendered long before they were born, and that the only folks that benefit from that plan are the ones paying the salesman. When the college recruiter tells you that tuition has been frozen, ask him why that doesn’t include housing and fees. And when the born-again pensionists, swaddled in their vestments woven of self-satisfaction, preach to you about ethical and moral obligations of supporting a pension system that has been manipulated 6 ways to Judea, remind them of the moral implications of paying no state income taxes on their pension income.

Because none of these folks come with children’s warning labels. Perhaps the entire state of Illinois should.


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