Posted May 12, 2016 11:50 pm by

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By: Mark Glennon*

 

“The fact is, the current budget crisis was completely avoidable,” says House Speaker Michael Madigan, and Illinois Issues’ Jamey Dunn wrote today that he’s right. “This crisis was avoidable long before…the current game of political chicken began,” she says.

 

How? By making permanent the temporary tax increase that began in 2011 and ended in December 2014, she says. She went on do a we-told-you-so for Illinois Issues’ warning in 2013 that the state was not preparing for expiration. “Under the temporary tax increase, the state’s budget situation began to stabilize,” she says. “The state started consistently making the full pension payment without borrowing. The payment cycle for bills was shortened as Illinois began to slowly chip away at its backlog.”

 

Nonsense. Keeping the tax in place would only have temporarily softened the crisis. A train wreck was already unfolding that was inevitable, with or without expiration.

 

The state has never come close, at least during this century, to making “full pension payments,” as Ms. Dunn claims. The state makes contributions set by statute that are basically arbitrary and are not actuarially sound. As we showed recently, and as an actuary explained here before, it would take another $3 billion of annual taxpayer contributions just to keep the pensions from sinking further and an additional $3.5 billion to amortize the unfunded liability in a standard manner. By way of background, the temporary tax increase raised about $5 billion per year in its last year.

 

Where did the temporary tax increase go? Pensions and pension bonds — 92% of it. None other than Senate President John Cullerton, a leading supporter of the increase, had it about right:  Of the $31.6 billion raised over the course of the temporary tax increase, $8 billion went to bonds issued to make pension payments and $21 billion went to direct payments to the state’s pensions, he wrote. He got what he wanted out of the tax increase — cash for public union pensioners to whom he is committed. Yet, because that still wasn’t adequate, unfunded pension liabilities grew by about $$20 billion over that period!

 

Source: Illinois Comptroller, https://vendorassistanceblog.wordpress.com/category/illinois-bill-backlog/

Source: Illinois Comptroller, https://vendorassistanceblog.wordpress.com/category/illinois-bill-backlog/

As for the effect on unpaid bills, little progress was made, only temporarily reducing the backlog by about $3.2 billion. They stood at 6.38 billion at the start of the temporary tax and ended at $4.36 billion. The backlog had already started back up during the last year of the tax increase — 2014 (at a faster pace than seasonally normal), as shown in green in the chart on the right.

 

What about the other side of the tax increase’s effects? Did it perhaps contribute to the flight of employers and erosion of the tax base? No mention of that by Ms. Dunn.

 

More importantly, doesn’t the personal effect on taxpayers at least deserve a mention? Seven hundred bucks per year, roughly the amount of additional tax for a working class family, means a lot to most of them. It might be the difference between whether they take the vacation they’ve been saving for, a new computer for the kids or a little cushion to survive a layoff. Many of them are in their own financial crisis.

 

Look, nobody is claiming tax increases don’t have to be part of the ultimate solution. The point here is just that simplistic, uninformed claims about how this crisis could have been avoided have to stop. Deal with the reality that the numbers are overwhelming. Illinois right now is running $6.2 billion in the red on an annual basis even with the harsh spending cuts now in place. Eliminating that deficit, ending those cuts, paying off the bill backlog and properly funding the pensions would require an astronomical increase if taxes alone were the answer — probably at least $14 billion — that would cause a stampede out. (Ms. Dunne made only token mention of other reforms that might have been made, which she didn’t specify.)

 

Only drastic changes including pension cuts, spending reductions and aggressive reforms that restore economic growth could have prevented a crisis. Only that will get us out of this. We’ll be writing more about economic growth shortly, which is absolutely essential to resolving this catastrophe.

 

*Mark Glennon is founder of WirePoints. Opinions expressed are his own.