WHAT'S THE MATTER WITH ILLINOIS?

March 17, 2010

Over the last two budget cycles, every state except North Dakota has had to close a budget gap.  But a handful of states stand out for the depth of their fiscal problems.  The most puzzling member of the "over 25 percent club" is Illinois, says Josh Barro, a Senior Fellow at the Manhattan Institute. 

Illinois did not see a particularly large bubble (or burst) in property prices, does not have outsize exposure to finance or tourism, and has a lower-than-normal reliance on its flat income tax.  So how did the state achieve a staggering budget gap equaling 47 percent of its fiscal 2010 budget, second only to California? 

The trouble is that Illinois did not enter the recession from a position of budget balance, says Barro: 

  • While California's budget shenanigans have garnered national attention, Illinois' behavior has been similarly poor but less widely noticed.
  • The Land of Lincoln has not truly balanced its budget since 2001, and its large structural deficit has it poised for fiscal ruin in the recession.
  • While other states can blame external economic factors, the key cause of Illinois' budget crisis is legislative malfeasance. 

Illinois has taken the budget gimmicks seen in many states to an extreme.  Occasionally, states postpone payments during budget crises to close budget gaps.  But for the last decade, Illinois has made a standard practice of delaying vendor payments -- even in good years -- and then periodically floating general obligation bonds to clear the backlog, says Barro. 

The state has also used its pension system as a venue for stealth borrowing, says Barro: 

  • From 1996 to 2008, the state's unfunded pension liability grew by $36 billion -- and $19 billion of that growth was due to elected officials funding pensions below the actuarially required level.
  • Another $6 billion was attributable to benefit increases enacted ten years ago at the height of the dot-com stock market bubble. 

Illinois cannot go on forever with a fiscal strategy of borrowing to finance current operations.  The state already has one of the worst credit ratings in America (though still better than California), which will continue to deteriorate so long as the state's structural deficit and pension underfunding problems persist.  If the state fails to control spending and fix its pension problem, it is poised to follow California off a fiscal cliff, says Barro. 

Source: Josh Barro, "What's the Matter With Illinois?" Real Clear Markets, March 16, 2010. 

For text:

http://www.realclearmarkets.com/articles/2010/03/16/whats_the_matter_with_illinois__98384.html 

 

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