Illinois' Budget: From Worst to 'Worster'

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What could be worse in Illinois right now? It's November and ‘Da Bears' are barely above .500, while the hated Packers are undefeated and the Lions (the Lions?!) are positioning themselves for a playoff run.

Here's what could be worse. Illinois' state budget, filled with gimmicks, constructed for years on promises for which there were no revenues, and sustained by borrowing of the type that would make even a loan shark blush, is in serious meltdown mode. Less than a year after the state raised taxes by some $7 billion in the face of a fiscal crisis, legislators in Springfield, whose government qualifies as the fiscal bad-boy of states, have done little to address Illinois' long-term spending and borrowing problems.

Even while the state's vendors wait up to a year for money they are owed, Gov. Pat Quinn is making sure that favored insiders get paid. The Securities and Exchange Commission is investigating whether Illinois exaggerated in bond offerings the savings it claims it will get from last year's largely cosmetic pension reforms, which did little to fix the worst state pension problem in the country. And now the governor is actually proposing the state borrow even more, up to $5 billion, to clear up some of those back bills, which prompted an editorial from the Chicago Tribune under the simple headline: "No. More. Borrowing."

Illinois is like the Bears after Walter Payton, the Bulls after Michael Jordan. Except that it's been even longer since the state could claim it had a championship season. As Josh Barro showed in a City Journal article earlier this year, the state has long tried to deliver services without having the revenues to pay for them. It essentially wanted to be a low-tax (or at least a moderate-tax) state with high services and rich employee pensions. One result has been that the state hasn't really balanced its budget for a long time. Instead, even during the national good times earlier this decade, Illinois used borrowing and gimmicks to create the appearance of fiscal propriety, though few people were fooled. As Indiana's Gov. Mitch Daniels likes to say whenever he talks about his own state, it's easy to look good when you have Illinois for a neighbor.

But late last year it seemed as if Illinois had finally reached the limit of its shenanigans. Investors balked at buying the state's bonds except at a significant premium over what other states had to pay investors. CMA Datavision actually listed Illinois debt as one of the 10 biggest risks among governments in the world, along with places like Greece and Iraq. With borrowing problematic, state legislators panicked and enacted steep increases in personal income and business taxes in January, which have come to be known as the Quinncome taxes. The Chicago Tribune estimated that the tax increases take an extra week's worth of earnings away from workers in the state and gives them to government. There, the money seems to be disappearing into that great celestial body known as the black hole of Springfield.

The problem is that little has changed in the state capital. Faced with a pension system that Joshua Rauh of Northwestern University's Kellogg School estimates could become the first state retirement plan to run out of money, Illinois enacted extremely modest reforms last year that only apply to new hires and do little to shore up the system because the savings don't kick in for years. Then, in classic Illinois style, the state claimed those future savings on this year's budget in order to narrow its deficit.

One result of the failure to fix pensions is that the system's costs are eating up tax revenues, including from the tax increase. The state's annual pension contributions are up by $2 billion since 2008, while debt service from pension obligation bonds, which the state floated several times in the last decade to prop up the system, have increased by $1.14 billion, according to the Civic Federation of Chicago. In all, pension costs consume $5.8 billion, or more than 17 percent, of all Illinois general fund spending. Those costs will rise by $500 million next year and $2 billion in five years without reform.

The state has also continued to issue markers to people it owes. The Civic Federation recently estimated that Illinois' backlog of unpaid bills financed out of its General Fund will grow to $5.5 billion this year. That state has an additional backlog of some $2.8 billion in business tax refunds and Medicaid and employee health insurance bills, for a whopping $8.3 billion in outstanding invoices.

Those business tax refunds the state is holding onto are especially rankling to firms. Imagine having your corporate tax rate boosted by nearly 50 percent to bail out your state, which then doesn't bother using the money to pay you a refund you have coming. Meanwhile, the Chicago Sun-Times reported recently that Gov. Quinn intervened to ensure that a well-connected Illinois Democrat and his lawyers received a timely $285,000 payment they had coming from the state.

There are many titles that you could apply to Illinois, but The Loophole State fits especially nicely. One way the state balanced this year's budget is via a loophole that lets the state forego paying some of this year's Medicaid bills, about $1.7 billion, until next year. Of course without reform the state is very unlikely to have enough money next year to pay all of its Medicaid bills plus the additional $1.7 billion from this year.

Hence Gov. Quinn's desire to borrow another $5 billion or so. Once you get on a treadmill like this, you can't get off, it seems. The state's bonded debt has increased to $30 billion from $9.4 billion since just 2002. Still, if the state offers a big premium to investors hungry for yield in this low-interest rate environment, some may yet be willing to scoop up the state's debt, though the prospect of loaning money to a state that owes, according to the Tribune, some $200 billion in muni debt, unpaid bills and unfunded pension obligations may also prompt some investors to pause.

In fairness, Illinois is not the only state that's failed to address its most fundamental fiscal problems since the financial meltdown of 2008. But Illinois has been so far and away the worst state fiscally that after the crisis earlier this year it appeared legislators in Springfield had no place to go but up. Apparently not.


Steven Malanga is an editor for RealClearMarkets and a senior fellow at the Manhattan Institute

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