Illinois is Overtaxed

"I Pay $271 A Month To Schools And I Don't Have Kids": Illinois Bureaucracy Sucks Homeowners Dry, Submitted by Tyler Durden, 8/05/15

Ever since the Illinois Supreme Court struck down a pension reform bid in May, prompting Moody’s to downgrade the city of Chicago to junk, the state’s financial woes have becoming something of a symbol for the various fiscal crises that plague state and local governments across the country. 

The state High Court’s decision was reinforced late last month when a Cook County judge ruled that a plan to change Chicago’s pensions was unconstitutional.

As we’ve discussed at length, these rulings set a de facto precedent for lawmakers across the country and will make it exceedingly difficult for cities and states to address a pension shortfall which totals anywhere between $1.5 trillion and $2.4 trillion depending on who you ask.

For Illinois, the situation is especially vexing. As you can see from the following graphics, the state’s unfunded pension problem is quite severe. 

The charts show an unfunded pension accumulation at $104.6 billion with funding levels from 36% to 46% compared to full funding at 100%. (Charts: Chicago Tribune)

As the New York Times explains, "pension costs in many American states and cities are growing much faster than the money available to pay them, causing a painful squeeze. Officials who try to restore balance by reducing pensions in some way are almost always sued; outcomes of these lawsuits vary widely from state to state. Some of the worst problems have been brewing for years in Illinois, particularly in Chicago, where the city’s pension contributions have long been set artificially low by lawmakers in Springfield, the state capital. With more and more city workers now retiring, a $20 billion deficit has materialized."

And while we’ve spent quite a bit of time discussing the various issues involved in the pension debate from overly optimistic return assumptions to the use of pension-obligation bonds as stopgap measures, even we were surprised to learn just how convoluted the fiscal situation truly is in Illinois.

As the following excerpts from a Reuters special report make clear, Illinois is in bad shape, and fixing things isn’t going to be easy.

From Reuters

"Multitude of local authorities soak Illinois homeowners in taxes"

Mary Beth Jachec [a] 53-year-old insurance manager gets a real estate tax bill for 20 different local government authorities and a total payout of about $7,000 in 2014. They include the Village of Wauconda, the Wauconda Park District, the Township of Wauconda, the Forest Preserve, the Wauconda Area Public Library District, and the Wauconda Fire Protection District.

Jachec, looking at her property tax bill, is dismayed. "It’s ridiculous," she said.

A lot has been said about the budget crisis faced by Illinois - the state government itself is drowning in $37 billion of debt, and has the lowest credit ratings and worst-funded pension system among the 50 U.S. states. But at street level, the picture can be even more troubling.

The average homeowner pays taxes to six layers of government, and in Wauconda and many other places a lot more. In Ingleside, 55 miles north of Chicago, Dan Koivisto pays taxes to 18 local bodies. "I pay $271 a month just to the school district alone," he said. "And I don't have children."

The state is home to nearly 8,500 local government units, with 6,026 empowered to raise taxes, by far the highest number in the U.S. 

Many of these taxing authorities, which mostly rely on property tax for their financing, have their own budget problems. That includes badly underfunded pension funds, mainly for cops and firefighters.

A Reuters analysis of property tax data shows that the sheer number of local government entities, and a lack of oversight of their operations, can lead to inefficient spending of taxpayer money, whether through duplication of services or high overhead costs. It leads to a proliferation of pension funds serving different groups of employees. And there are also signs that nepotism is rife within some of the authorities.

On average, Illinois’ effective property taxes are the third highest in the U.S. at 1.92 percent of residential property values.

In many Illinois cities and towns, high taxation still isn’t enough to keep up with increasing outlays, especially soaring pension costs, and some services have been cut. For example, in the state capital Springfield, pension costs for police and fire alone will this year consume nearly 90 percent of property tax revenues, according to the city's budget director, Bill McCarty. 

Sam Yingling, a state representative who until 2012 was supervisor of Avon Township, north of Chicago, has become an outspoken critic of the multiple layers of local government.

Yingling said when he left the township three years ago, the township supervisor's office had annual overheads from salaries and benefits of $120,000. He claimed its sole mandated statutory duty was to administer just $10,000 of living assistance to poor residents.

The large number of local governments is a legacy of Illinois' 1870 constitution, which was in effect until 1970. The constitution limited the amount that counties and cities could borrow, an effort to control spending.

So when a new road or library needed building, a new authority of government would be created to get around the borrowing restrictions and to raise more money. Today, for example, there are over 800 drainage districts, most of which levy taxes.

And it isn’t only the number of authorities that is a concern. Illinois has about one sixth of America’s public pension plans – 657 out of almost 4,000.

Local authorities in Illinois are mandated by law to keep the Illinois Municipal Retirement Fund, with 400,000 local government members, fully funded. They had to contribute $923 million in 2014, up from $543 million in 2005.

However, there is no such requirement for the local pension funds. The result: Many of these funds throughout the state are woefully underfunded, and some have less than 20 percent of what they need to meet obligations.

The piece - which you're encouraged to read in full as it contains several of the most egregious examples of government waste and inefficiency you'll ever come across - goes on to say that reform simply isn't an option, as the Illinois legislature is filled with lawmakers who have at one time or another themselves benefited from the state's sprawling local bureaucracies. Reuters also says it has identified nearly a dozen instances where husbands employ wives, mothers employ daughters, and fathers hire sons," suggesting nepotism weighs heavily on the already elephantine system. 

Bear in mind that this is the same state whose court system refuses to allow efforts at pension reform to move forward, and while all of this may seem like a recipe for disaster, just remember, PIMCO sees a lot of "long-term value" in Chicago's debt.

Source: see charts at:

http://www.zerohedge.com/news/2015-08-05/i-pay-271-month-schools-and-i-dont-have-kids-illinois-bureaucracy-sucks-homeowners-d