Dupage Policy Journal

Dupage Policy Journal

Tuesday, December 10, 2019

Budget described as no solution to Illinois insolvency

Local Government

By Karen Kidd | Jul 21, 2017


While state lawmakers ended a two-year budget impasse, the measures adopted by the Illinois Legislature will not fix the state's fiscal mess, an analyst who co-wrote a paper that places the state 49th in long-run solvency told the Sangamon Sun.

"The measures they passed to get a budget are not sufficient to deal with structural drivers," Eileen Norcross, senior research fellow at the Mercatus Center at George Mason University, said via email. "They’ve yet to tackle spending reform. Taxes are going up. And this does not signal a good business environment, which could hurt their long-run growth prospects."

Norcross, who also directs the Mercatus Center’s State and Local Policy Project, said genuine structural pension reform would signal an end to ever-increasing underfunded obligations, going a long way toward turning things around in Illinois.

Mercatus Center Director for the State and Local Policy Project and Senior Research Fellow Eileen Norcross

"Tax and regulatory reforms that encourage growth would signal a commitment to making Illinois a place where people want to live and do business," she said. "Spending reform, an overall review of Illinois’ budget and how services might be provided more efficiently would help to lower spending."

Norcross determined that Illinois ranks second-worst in the nation, behind New Jersey, in long-run solvency, a measure of a state's hedge against large long-term liabilities. Norcross wrote the paper with Olivia Gonzalez, a research associate with the policy project.

The paper also found Illinois ranks 48th in having enough cash to cover its short-term bills, 46th in being able to cover its fiscal-year spending with current revenues, and 46th in trust fund solvency, which measures how much debt a state has. The latter ranking reflects Illinois' $119 billion net pension debt.

That pension debt is a primary reason Illinois shouldn't be too smug about ranking ahead of New Jersey in long-run solvency, Norcross said. 

"While Illinois is 49th and New Jersey 50th, I’d be a little more concerned about Illinois’ future," she said. "New Jersey has undertaken some reforms. They are talking about doing more in the future."

Illinois, by contrast, appears unable to tackle the biggest driver of its problems: underfunded pensions, Norcross said. 

"And they continue to use one-shot fixes to patch up things for the short-term," she said. "They are not thinking long-term. The credit ratings agencies are signaling they don’t think the passage of the recent budget is enough to stave off a possible junk rating -- which raises interest rates on debt."

Which means New Jersey is in better shape based on that measure, Norcross said.

"Illinois is in worse shape than New Jersey," she said. "They are unable to effectively reform their pension system because benefits – even those not yet earned by current employees – are constitutionally protected."

The state also has amassed a backlog of other bills, Norcross said. 

"And they have been using accounting assumptions to mask the full size of unfunded liabilities in order to make the bills appear more manageable," she said. "New Jersey has been harder on themselves in terms of measuring their pension liabilities. They have  also been more persistent in undertaking structural pension reforms."

A relatively good number for Illinois in the paper is the state's 20th ranking in service-level solvency measures for how high taxes, revenues and spending compare with a state's personal income. However, the paper was developed before July 6, when the Illinois General Assembly overrode Republican Gov. Bruce Rauner's veto of a budget that was long on spending and tax hikes but short on reforms.

The new state budget raised Illinoisans' individual income tax rate to 4.95 percent from 3.75 percent and the corporate rate to 7 percent from 5.25 percent. While that is 32 percent increase, it won't be enough, Norcross said.

"The tax increase is estimated to bring in about $5 billion," she said. "They have a backlog of close to $15 billion in unpaid bills, which could actually be larger. This is a Band-Aid on a hemorrhage. There is talk of issuing a bond which, again, would patch up current spending needs, but it’s not a long-term strategy to put the state on a fiscally sustainable path. There is also talk of using more favorable assumptions to measure pension payments in order to keep the bill ‘manageable,’ but this only pushes the part of the bill forward.”

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