CHICAGO (CBS) – A conservative think tank has proposed an alternative state budget that would cut wages for state employees by 10 percent; require retired workers to pay for their own health care premiums; and force local school districts to fund teacher pensions, instead of the state.

John Tillman, Executive Director of the Illinois Policy Institute, said his group’s budget plan would save the state $7 billion a year and cut the average taxpayer’s income tax bill by $1,500.

WBBM Newsradio’s John Cody reports Tillman estimated Illinois would save $800 million a year if it shifted the burden for teacher pensions to local school districts. Currently, the state is responsible for paying the employers’ portion of teacher pensions for all districts outside of Chicago. Chicago has its own teacher pension plan.

LISTEN: WBBM Newsradio’s John Cody reports

Gov. Pat Quinn, Illinois Senate President John Cullerton and Illinois House Speaker Mike Madigan have all voiced support for legislation to make local school districts pay for teacher pensions, instead of the state.

But such proposals have met stiff resistance from downstate lawmakers and school districts, which would need to impose major property tax hikes to pay for the new pension costs.

Tillman also estimated Illinois could save $520 million a year by cutting state workers’ salaries by 10 percent, and he said the state could save another $1.7 billion a year by letting private insurance companies take over distribution of Medicaid dollars. He said the state would fund premiums for those at or below poverty level.

“The way Medicaid is implemented right now, you have a tremendous number of employees at the state level who administer the Medicaid program, manage the payment system,” he said. “That would all be eliminated. It would shift all of the administrative costs of health care for the poor to the private sector, that’s already doing this with private insurance. So, it actually would reduce bureaucracy.”

Tillman said the present state spending cap of $36 billion is a sham, since that’s $2 billion more than state revenue. He said, if the state intends to save tax dollars, it must reduce the state spending cap to $29 billion.

Asked if it’s fair to start requiring retired state workers to pay their own health care costs, Tillman said it’s just as fair as requiring Illinois residents to pay a state income tax of 5%, when they’d been used to paying 3%.

“The average household paid about $1,540 per household from a tax increase that passed in January 2011,” Tillman said. “This plan puts us on a path to fully repeal that effective January 2013.”

The full tax hike was already set to last for only four years, but it is not set to ever return to its original 3 percent rate. After 2014, the individual income rate is scheduled to drop to 3.75 percent. In 2025, the individual rate is scheduled to drop to 3.25 percent.