State in Trouble

volcano

WSJ March 7, 2020

Spendthrift Illinois Races Toward Default

By trying to tax its way out of fiscal disaster, the state makes matters worse. There’s a simple solution.

By Orphe Divounguy | 795 words

For 13 years, Puerto Rico has been in a man-made recession aggravated by natural disasters. In 2017 the island territory asked a federal court for bankruptcy protection, but it’s still grappling with $70 billion in debt. Puerto Rico’s fiscal fiasco offers a glimpse of what the future could hold for Illinois if it doesn’t deal with its own self-imposed economic disaster.

Long the economic hub of the Midwest, Illinois has lost more than 850,000 residents to other states during the past decade. The state has been shrinking for six consecutive years and suffered the largest raw population decline of any state in the 2010s. Puerto Rico has been plagued by people problems too, shedding population in nine of the past 10 years.

Like Puerto Rico, Illinois is drowning in a sea of red ink. Growing government debt and a crushing tax burden are depressing economic growth. State spending is up, but personal-income growth is lagging. Since 2000, Illinois’s per capita personal income growth has been 21% lower than the national average. Home prices are growing at the second-slowest pace in the nation, at only 2% compared with 5.1% on average nationwide. With speculation that Illinois could be the first state to go into default, ratings firms are paying attention. Illinois’s credit rating is one notch above junk.

Shortly before Puerto Rico’s bankruptcy filing, The Wall Street Journal described “an exodus of workers, retirees and entire families” fleeing a deepening economic crisis. “For years, Puerto Rico borrowed more—and incurred higher fixed costs—to buy time to stave off deeper economic overhauls,” according to the Journal report. Creditors and analysts said Puerto Rico’s problems were aggravated by “government overspending and promises to unions for employee benefits that officials knew they wouldn’t have the resources to properly fund.”

The description also fits Illinois, but it doesn’t have to. Illinois’s public pension payments already consume nearly a third of the state budget, yet the unfunded liability—which the state currently pegs at $137 billion, though others put the figure much higher—continues to rise. Local government services are also being squeezed by pensions, contributing to rising property taxes that are the second-highest in the nation. Since 2000, Illinois has increased pension spending by more than 500% but cut by a third services that help students pay for college, protect children from abuse, aid the poor, and fight disease.

Moderate reforms could stabilize Illinois’s five state-run and hundreds of local pension funds, but politicians have consistently refused to consider them, preferring instead to increase taxes steadily. Illinois has a culture of trying—and failing—to tax its way out of its problems. In 2011 then-Gov. Pat Quinn approved a temporary tax hike aimed at making a dent in the state’s $8 billion in unpaid bills. By 2014, Illinois still had a $6.6 billion bill backlog, and lawmakers were calling for families and businesses to give up more money. Another permanent income-tax increase came in 2017, but again more taxes failed to solve Illinois’s problems.

The problems, in fact, got worse. In his freshman year, Gov. J.B. Pritzker signed into law 20 new taxes and fees totaling nearly $4.6 billion, including a doubling of the gasoline tax. Now Mr. Pritzker wants a progressive income tax he claims will really solve the issue. He’s asking voters to give him a green light on Nov. 3.

Mr. Pritzker is wrong to tell voters that 97% of them “will not see an increase.” Because when voters decide whether to push forward his progressive tax, they won’t get to vote on rates. As the Illinois Policy Institute reported, solving the pension issue would require a progressive income-tax hike of $10 billion. Mr. Pritzker’s current plan to tax $3.7 billion out of the state economy dedicates only $200 million to pensions.

There is hope for the people of Illinois. State pensions can be fully funded, Illinois taxpayers can save $50 billion over 25 years, and dollars can be freed to support their eroding public services. Policy makers can finally shrink Illinois’s pension liability by reducing the main driver of its growth: the cost-of-living adjustment, or COLA. Currently, the COLA doesn’t reflect any actual cost-of-living increase, since it isn’t pegged to inflation. By simply replacing the existing guaranteed 3% compounding postretirement raise with a true COLA pegged to inflation, among other modest changes, Illinois can save $2.4 billion in the first year alone. No current retiree would see a decrease in his pension check. Current workers would preserve their core benefit.

Failed fiscal policy has left the Land of Lincoln just a few steps ahead of Puerto Rico, but all isn’t lost. Just as Illinois’s financial disaster was man-made, so too can be its recovery.

Mr. Divounguy is chief economist at the Illinois Policy Institute.

The Wall Street Journal

Posted in ,,, and tagged

Categories