January 23, 2012
As the Greek default (and it is a default no matter what they end up calling it) is finalized this week, the consensus seems to be that failure to reach a deal would cause a global financial apocalypse.
That may be true. And if it is, why aren’t we more worried about Illinois? It’s more or less the same size as Greece, its finances are in the same generally catastrophic shape, and its leaders are just as feckless and dishonest. It owes tens of billions of dollars to various investors and stakeholders and will clearly have to stiff many of them at some point. The following article captures the “failed state” dilemma perfectly:
Dripping with red ink: Will anyone fix Illinois’ budget mess?
The question isn’t whether Illinois’ finances are in dreadful shape, it’s how to fix the problem. Or perhaps more accurately, will legislators have the political will to fix it when they return to Springfield for their spring session?
Even though the legislature and Gov. Pat Quinn last year imposed a temporary 67 percent state income tax increase, Quinn’s office expects to have a $500 million budget deficit this year.
Quinn is calling for a 9 percent cut in most areas of state government, except education and health care. But even with cuts at that level, the state would have a projected $800 million budget deficit for fiscal 2015, the year when most of the tax hike expires.
Quinn’s budget spokesman, Kelly Kraft, said the state’s fiscal situation is not pretty.
“These projections clearly demonstrate that action must be taken to control not only Medicaid costs but also (pension) costs, or all other areas of government will continue to be squeezed,” Kraft said.
Looking at the bigger picture, the state has a backlog of about $8.5 billion in unpaid bills and owes about $27 billion in outstanding bonds. And then there’s the roughly $80 billion owed to the state’s public employee pension funds.
Now, legislative leaders and Quinn are floating ideas to cut the two areas that account for the biggest chunks of the state budget — pension contributions and Medicaid.
In the proposed $33.7 billion budget for fiscal 2013, the state’s pension payment will be $5.3 billion, and Medicaid will cost taxpayers about $7 billion.
Proposals include reducing the benefits or the eligibility for Medicaid. On pensions, ideas include decreasing the benefits and increasing the contributions for current employees. A new pension system was approved last year, but it’s only for new employees, and there’s debate on whether the benefits for existing employees can legally be changed.
One of Quinn’s ideas for reducing the state’s pension costs is to shift the burden somewhere else: to local school districts.
“About 21 percent of what the state puts in … is for state employees,” Quinn told reporters earlier this month. “More than half of the money we contribute every year is for teachers who are outside of the city of Chicago — suburban and downstate teachers.”
Supporters of the idea say it would make school districts think twice about giving employees big raises at the end of their careers to boost their pensions. School districts would have some skin in the game if they had to pay for those pension boosts, rather than the state, the supporters say.
Opponents argue that shifting costs to local school districts isn’t real reform, and would just force them to increase local property taxes.
Improving the picture won’t be easy when the legislature reconvenes Jan. 31, particularly in an election year, when politicians might find it difficult to cut services for constituents or hurt the feelings of unions that represent state workers.
To summarize, even after a massive tax increase Illinois is looking at a half a billion dollar deficit. That actually sounds manageable in the scheme of things — not even a billion dollars, chump change in this inflation-ravaged world. But the annual deficit is less of a threat than all those accumulated liabilities: “Looking at the bigger picture, the state has a backlog of about $8.5 billion in unpaid bills and owes about $27 billion in outstanding bonds. And then there’s the roughly $80 billion owed to the state’s public employee pension funds.”
The reported deficit, in other words, doesn’t include all the stuff that should have appeared in past budgets but was hidden in order to get through the next election. How a state with a constitutional mandate to balance its budget can do this in the first place — and how an “unpaid bill” can be excluded from the annual budget — is a question for future prosecutors. But for investors it’s a clear sign that some sort of default is coming.
Why then would anyone buy an Illinois municipal bond, or accept a state contract that requires future payments, or move a business to the state, or keep a business in the state, or do anything else that required faith in the willingness or ability of the state to pay its bills? The only possible answer is that Illinois isn’t Greece; it’s Spain or Italy, an entity so big and important that its failure is inconceivable. When it hits the wall, Washington will have no choice but to step in and cover its unfunded pensions and teacher salaries and muni bond interest. In the same way that a Spanish bond is really a German bond because Germany has no choice but to make good on it, the big insolvent US states are wards of the central government.
The bottom line effect of all this stepping up and bailing out is to exchange a solvency/debt crisis for a currency crisis in which the markets at some point figure out that failed states are so numerous and their needs so great that the printing presses will never stop.
This article was posted: Monday, January 23, 2012 at 1:17 am