SPRINGFIELD — Gov. Pat Quinn is set to outline his priorities for the upcoming legislative session during the State of the State address Feb. 1, but taxes, public pensions and Medicaid are expected to dominate the discussion in the capital through the spring.

By Andrew Thomason

SPRINGFIELD — Gov. Pat Quinn is set to outline his priorities for the upcoming legislative session during the State of the State address Feb. 1, but taxes, public pensions and Medicaid are expected to dominate the discussion in the capital through the spring. 

This trinity of seemingly separate issues — skyrocketing health-care costs, ballooning pension payments and the state’s tax structure — actually are interwoven, said Tom Johnson, former director of the Illinois Department of Revenue and current president of the Taxpayers Federation of Illinois, non-partisan  fiscal and tax policy advocacy organization.

“The first place you have to look at is our pensions,” Johnson said. “It’s what’s crowding out all other areas of government, human services and education.”

Until then, new money from the year-old income tax increase “will be used primarily for payment of debt, not sustaining government services.”

Pension payouts or reform

Illinois has an unfunded pension liability — how much the state owes in payouts compared with the fiscal resources on hand — of $85 billion. The state is expected to put $5.3 billion into the state’s pension system for this coming fiscal year, about $1.1 billion more than the most recent payment.

“We’re in a crisis … I really don’t think we have a choice (about pension reform) anymore,” state Rep. Tom Cross, R-Oswego, said in a news conference this month.

Cross and House Speaker Michael Madigan, D-Chicago, outlined a plan this past spring that creates different levels of pension benefits for state employees. Employees would keep their current pensions, but they would have to pay more. Or workers could participate in a 401(k)-style pension that wouldn’t offer the same level of benefits, but would be less expensive.

Cross said he would push this plan again this spring.

Quiet on the issue until recently, Quinn earlier this month said pension reform would be a major priority of his administration this spring.

“I do think it is important that we take this year, 2012, and do some hard things when it comes to the finances of Illinois, and that begins with pension reform,” Quinn said. “For 30 years — three decades —governors and legislators didn’t do enough. They let it go; it’s time now to tighten up and get it done.”

Quinn put together a commission to study pension reform, but he hasn’t laid out specific changes, saying robust dialogue about the issue is needed before a plan can be formulated.

Strain of Medicaid

Medicaid spending is growing quickly, as well. The state will shell out $7 billion, or about 12 percent, of its $33.2 billion budget for the state-run health-care program as part of the federal federal Patient Protection and Affordable Care Act.

That cost is expected to climb about $700 million in the next budget.

Quinn last spring proposed cutting the amount Medicaid providers are paid, but the Legislature didn’t pass any supporting legislation.

Lawmakers opted instead to require residency and income verification, both of which go against the rules in the health-care overhaul passed by Congress and signed by the president, the federal government said.

State Rep. Patti Bellock, R-Hinsdale, co-chairwoman of the Illinois House Medicaid Reform Committee, said the state is seeking waivers from the federal government to implement its changes. With or without the waivers, more talk about how to slow Medicaid spending is inevitable, Bellock said.

“There are going to be some uncomfortable conversations, (but) we have to address the issues of Medicaid in Illinois,” Bellock said.

Tax squeeze

There is another squeeze in the near future, beyond the current issues facing Medicaid and pension funding.

The 67 percent personal income tax increase passed a year ago is set to go from the current rate of 5 percent to 3.75 percent at the end of 2014, then back to the pre-increase rate of 3.25 percent by 2025. This will create a huge revenue hole in the budget that will be filled with either more taxes, major changes to the state’s Medicaid and pension systems, or some combination of both.

Statehouse observers and lawmakers have predicted that some form of tax reform is expected to come to fruition before the extra money from the income tax increase, estimated to be $7 billion annually, goes away.

State Sen. Toi Hutchinson, D-Olympia Fields, sponsored legislation late last fall that gives tax breaks to businesses and low-income families. It was approved by the General Assembly and signed into law by Quinn. She said reforms to Medicaid and pensions must be accompanied by changes to Illinois’ tax structure.

“Buckle your seat belts and keep your arms and legs inside the vehicle, because it’s going to be a bumpy ride,” said Hutchinson, who worked on tax-reform legislation in the past.

Hutchinson wouldn’t speculate on the result of a broad tax debate, saying only that it must be something realistic that creates an environment friendly to businesses and individuals and provides the money to keep the state government’s core services running.

“We are in the middle of a frame where you have extremes who say big government doesn’t have a role in anything … and then you have folks on the other extreme who believe government can save everything, which we know isn’t true,” Hutchinson said.

Johnson said any changes to the tax structure need to be preceded by changes in spending.

“The tax increase did not resolve the issues, because we didn’t really tackle, in any significant way, the spending side of the budget,” Johnson said.

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