Illinois’ True Budget Hole is About 2X What’s Being Negotiated. It Won’t be Plugged. – WP Original
By: Mark Glennon*
Governor Rauner and legislative leaders were widely reported today to be discussing how to fill a budget hole of about $7 billion. The real number is closer to twice that, and probably much higher. They won’t come close to eliminating the true deficit. Here’s why:
That $7 billion is the difference between total income and total expenses projected for the 2018 fiscal year, which will start July 1 of next year. (The budget projected for the remainder of this 2017 fiscal year doesn’t indicate much because it’s for just half the remaining year and assumes use of several one-time revenue sources.) The projection is set forth and discussed in two documents linked here and here prepared by Budget Director Tim Nuding, who is honest and competent, and has bipartisan respect.
The problem is mainly that government budgets aren’t real, and you need to make some adjustments to get at commonsense numbers. Let’s make just three adjustments to get a better sense what the real number is (though plenty more than these three could be made).
Start with that projected deficit, which is $7.1 billion. Add to that the growing unfunded liabilities in state pensions, which is the primary place where losses have been hidden in the state budget as well as municipal budgets across the state. We don’t fund our pensions adequately to keep those unfunded liabilities from growing. For the state, it would take at the very least another $3.4 billion just to keep that pension debt from growing. (That number was discussed by an actuary in an article linked here.)
That 3.4 billion is extremely optimistic. It assumes all the usual phony assumptions used by pension actuaries are valid. In truth, Illinois’s pension debt grew by $19 billion last year. It has grown by an average of $6.8 billion per year since 2003. It also assumes nothing is spent to amortize or pay off the unfunded liability, which is grossly irresponsible. Still, let’s be very optimistic and assume the pension debt grows by just $3.4 billion. That takes us to $10.5 billion.
Then there’s the state’s backlog of unpaid bills, which is currently $10 billion and expected to grow to $13 billion by the end of this fiscal year. Those bills have to be paid somehow, and the assumption seems to be that the state will issue a bond to pay them off. Let’s assume the state is able to sell a 20-year bond at 4% interest to do that. That adds another $.9 billion per year in bond payments, taking us to $11.4 billion.
Finally, the projection being used assumes the very harsh spending cuts now in place will carry over. Opinion may vary on this, but my sense is that most Illinoisans would say that at least some cuts in social services and education have to be eliminated. In fact, for K-12 education, it’s hard to see how the state can avoid contributing more to help many dozens of broke school districts. Municipalities are already overtaxed and many are hemorrhaging red. They have the highest property taxes in the country, often exceeding 4%. They need tax reductions to break the death sprirals they are in. So, let’s add another $2.5 billion in expenses probably needed to restore services to a level acceptable to taxpayers, which makes the real deficit $13.9 billion — just about twice the number being negotiated.
You could make further adjustments to make the deficit more realistic. For example, the state has a $50 billion-plus healthcare liability for pensioners that’s entirely unfunded, constitutionally protected and grows every day, yet doesn’t show up in government budgets. But why bother to keep going?
For a little perspective, the now-expired temporary increase in the personal and corporate income tax raised only about $5 billion per year.
Do you think Illinois could stand a tax increase approaching triple that amount? Keep in mind that, already, people and employers are fleeing, the tax base is shrinking so total state revenue is declining (though the state’s projection assumes small revenue increases.) Flight would become a stampede if the true budget deficit was addressed through higher taxes.
The fact is that our fiscal crisis won’t really be solved without radical measures that would be extremely painful for several years but that would restore economic growth in the longer run — and economic growth is essential to making the numbers work for Illinois. Those radical measures have to include cuts to pension benefits (both earned and unearned), pay cuts, layoffs, labor reform, drastic consolidation of layers of government, aggressive pro-growth reforms and probably debt adjustment.
In other words, the truth is that Governor Rauner’s reform agenda is far too timid, yet it’s still too much for the majority in the General Assembly to consider.
Illinois remains the State of Denial.
*Mark Glennon is founder of WirePoints. Opinions expressed are his own.