Illinois’s Political Dysfunction

I’d meant to get to it last week but somehow it eluded me. The state of Illinois’s credit rating has been downgraded again:

On Tuesday, Standard & Poor’s downgraded Illinois bonds to A from A-plus, with a continuing negative outlook. The credit rating agency singled out five years of budget deficits ranging from bad to worse to way worse. It now stands at $44 billion—another national record. S&P was also more troubled than the Springfield political class about $83 billion in unfunded pension liabilities. The legislature ended a special session on pension reform this week without, well, passing any reform.

Obviously, there’s a problem. Not quite so obvious is what the problem is. Here’s a table that compares Illinois with its adjoining states:

State GDP (billion $) Population GDP per cap State spending Median income State spending per capita State spending as percentage of GDP
Illinois 670.727 12869257 52118 58.14 55735 4518 8.67
Indiana 278.128 6516922 42677 25.39 47697 3896 9.13
Wisconsin 254.818 5711767 44612 27.5 51598 4815 10.79
Missouri 249.525 6010688 41513 23.83 46262 3965 9.55
Iowa 148.986 3062309 48651 14.29 48872 4666 9.59
Kentucky 164.799 4369356 37716 23.55 41576 5390 14.29

Sources: usgovernmentspending.com, U. S. Census Bureau State & Local QuickFacts

Illinois is the richest Midwestern state, rejoicing in both the highest GDP, the highest per capita GDP, and the highest median income in the region. Its state spending per capita is higher than that of some of its neighbors, lower than others. Wisconsin, nominally a Blue State, spends more per capita. So does Kentucky, nominally a Red State. Clearly, Illinois’s problems aren’t there.

It spends less as a percentage of state GDP than any other state in the Midwest. Obviously, the problem isn’t there, either.

I can only speculate. Here are a few guesses:

  • Illinois’s financial problems aren’t due to current spending. They’re due to its huge overhang of public employee pension obligations, the result of years of incompetence in Springfield, particularly over the last dozen years.
  • Illinois’s peculiar political dysfunction is due to the enduring upstate (Chicago metropolitan area)-downstate (everywhere else) conflict.
  • Illinois’s problems are in part a consequence of its being the richest state in the Midwest. No one in Illinois lives more than about 150 miles from some other state and most of Illinois’s population lives within reasonable commuting distance of another state. That makes Illinois easy prey when business or sales taxes rise.
  • Illinoisans don’t believe they are receiving value for what the state is spending.
  • Illinoisans don’t believe that the state government has a right to a fixed (or rising!) percentage of their income.

I’m open to other suggestions. The reasons are important since it’s darned hard to know where to put the bandage unless you know where it’s bleeding.

Whatever the cause of Illinois’s dysfunction, a downgrade of Illinois’s bond rating will only make it harder for Illinois to solve its problems due to the increased cost of financing.

Update

Now we’re getting somewhere. Prodded by a remark in comments I went after total state debt. Here’s a comparison of Illinois and its adjoining states:

State Total state debt (billion $)
Illinois 271.1
Indiana 37.1
Wisconsin 79.6
Missouri 65.8
Iowa 25.2
Kentucky 63.7

Source: State Budget Solutions

Pretty obvious where Illinois’s problem is, isn’t it? Illinois’s per capita indebtedness is the highest in the nation at $21,067 per Illinoisan. That’s higher than California, New York, Texas, or New Jersey and dwarfs the figure for Illinois’s neighboring states. Note that via the linked source most of Illinois’s debt isn’t on the operating budget. It’s on public employee benefits and pensions.

Given those statistics it’s pretty obvious what Illinois needs to do. First, it needs to honor the First Rule of Holes. That means it needs to convert to a defined contribution plan for new public employees and revise the health insurance plans for public employees ASAP. I’ve already posted at length about Illinois’s unique issues in dealing with its existing public employee pension commitments.

Second, Illinois desperately needs to pay down the principle on its debt on an accelerated basis.

Third, Illinois needs to remove borrowing authority from its state legislature (the legislature is empowered to borrow 15% of the state’s budget per annum) because, obviously, they can’t be trusted with it.

As I see it there are three barriers to putting Illinois’s fiscal house in order: 1) the political cowardice of its elected officials; 2) understandable opposition from the public employees’ unions; 3) the state constitution.

10 comments… add one
  • Drew

    In my opinion this is good analysis. Awhile back, at OTB, I got myself in hot water for pointing out that a professors “analysis” of the current tax burden was faulty because he looked at the ratio of national taxes to GDP. Anyone with a facility with numbers would understand that borrowing to goose the GDP number would make a tax to GDP ratio bizarre on its face. I of course got nowhere at OTB, because of the taxaholic nature over there these days. But per capita or as a pct of income would be better measures.

    And waddayouknow?! The income and per capita numbers are odd. No one should be surprised that IL is the richest state, or that per capita spending is relatively high. That just tells you that politicians will take it and spend it if it’s available. Kentucky is the surprise. That’s worthy of additional consideration.

    But to your direct query. I have to believe bullet point one is the key issue. A large public sector in a rich state means the general( plus of course a large urban area,) problem of pensions will dominate.

    Bullet point three just means that there is competition for domicile.

    And bullet points 4 and 5 are related. It’s simply an indictment of government spending.

    I know you have made this point before. And because I’m in the business I simply can’t tell you more emphatically how squarely you have hit the nail on the head. The pensions and other obligations are underfunded, and the actuarial assumptions on investment returns are just absurd. And that doesnt even take into account the shennanigans going on with early retirement and boosting pension payouts in the last couple years of employment. Despite all the criticism of ratings agencies the last few years, S&P knows this, and is reflecting its judgment in its bond rating.

  • PD Shaw

    I can’t tell if the state spending figures include special districts. Illinois has by far more units of government than any other state; I think PA is next and not particularly close. That makes an apples to apples comparison difficult w/ other states; I think you would have to combine both state and local government together, because the state essentially chooses the level of government.

    Illinois has three or four political cultural zones: Upper South, Midlands, Yankees and within the Yankee area is Chicagoland which probably should be seperated from Yankeeland. The last I looked Illinois Democrats were dependent on Democrats from the Upper South for majority control in the legislature who are in turn dependent upon state funding of prisons, rehabilitation centers, state hospitals, etc.

  • Illinois has by far more units of government than any other state; I think PA is next and not particularly close.

    Yeah, I’ve posted on this subject before. Illinois has something like three times as many independent taxing entities as any other state.

    Illinois has three or four political cultural zones

    Many years ago the Trib ran a fantastic article outlining the “Nine States of Illinois”. IIRC they were

    Onwentsia (the North Shore suburban area of Chicago)
    Da City (Chicago metropolitan area ex-the North Shore)
    South Wisconsin (Illinois north of I80 ex-Wabansia, Da City, and Quad Cities)
    Republic of Quad (Quad Cities)
    Greater Peoria
    The Sangamo City-State
    Lesser St. Louis
    Soybeania (most of the rest of the state)
    North Dixie (a distinct area along the Ohio River)

    A bit over-simplified but it was a pretty good and amusing start.

  • Andy

    I’m curious how much of the difference between Illinois and the other states is because of Chicago. Where would Illinois be if Chicago was transplanted elsewhere and what would happen if Chicago became the next Cleveland or Detroit? Also, it would be interesting to if there’s a substantial difference in where Illinois spends vs the other states.

    The debt load is pretty amazing – over $20k per capita? Holy cow.

  • Where would Illinois be if Chicago was transplanted elsewhere and what would happen if Chicago became the next Cleveland or Detroit?

    That’s the upstate/downstate dichotomy I mentioned in the body of the post. The state spends a lot in the Chicago metropolitan area but derives even more of its revenue from the Chicago metropolitan area than it spends there. While I think that Chicago goes a long way to explaining the state’s wealth relative to its neighbors, I think it’s the dichotomy between upstate and downstate that explains part of the fiscal irresponsibility. Although downstate folks see themselves as burdened by Chicago it’s actually the other way around: they get to spend more than they otherwise might because of Chicago.

  • steve

    “they get to spend more than they otherwise might because of Chicago.”

    Yet there is no shortage of vitriol from the right about how cities drain resources.

    Query- Going immediately to a defined contribution plan for existing employees would help, but it looks to me as though politicians are guilty of not funding pensions in the past. Wouldnt the state employees have a pretty good case for collecting what they thought they were due if they took this to court?

    Steve

  • it looks to me as though politicians are guilty of not funding pensions in the past

    This is one of now-impeached and serving time Gov. Rod Blagojevich’s contributions to our mess. Instead of contributing to the fund he expanded Medicaid benefits and eligibility and created new programs for seniors.

    And as I’ve written before, under the state constitution the state does not have the power to reduce promised public employee pension benefits.

  • PD Shaw

    In case my earlier comment on regionalism in Illinois wasn’t clear, my thesis is that the disparate political/curltural i.d. groups require some form of spoil sharing to form and maintain governing coalitions. I think it answers why a perfectly fine road is repaved (gift-givng by the governor). It also suggests the reason for a multiplicity of governments. Illinois gets a Yankee preference for township governments and a Pennsylvania (midlands) preference for special use districts. (Plus multiple units helps with spoil sharing)

    BTW: Illinois is first in the country with 6968 units of local government, and Pennsylvania second with 4,905.

  • Drew

    Query- Going immediately to a defined contribution plan for existing employees would help, but it looks to me as though politicians are guilty of not funding pensions in the past. Wouldnt the state employees have a pretty good case for collecting what they thought they were due if they took this to court?

    Heh. That’s a legal question that I will leave to others. But as a moral question? Why not? I hold no brief for public employees, and if you heard all the fraudulent end of career pension boosting stories you would be outraged. But the fact of the matter is, that’s been the deal.

    It will be interesting to see what happens. If I was King I’d let the public employees sue the politicians. But that’s a pipe dream.

  • Zenpundit

    One of the problems in reforming pensions in Illinos is that the fact that many ppl in the state pension system, due to a Clinton era exclusion in Federal law, are ineligible to collect Social Security. Aside from the unconstitutionality, having mid to late career ppl switch to defined contribution plans represent an enormous personal economic hit as there is no time remaining in their careers for investment results to yield a return that would make retirement possible, much less the payments they had been promised. This is one reason for employee union obduracy.

    The second reason is that a state legislature with a track record of not meeting it’s obligations to fund the state pension system is no more likely to meet obligations to match funds contributed under previous bills that proposed to create individual IRA type accounts. This would have serious actuarial effects for individuals and the state’s lack of good faith in this regard can be seen in the governor’s desire to shift the burden created by Springfield onto local school districts and taxpayers ( either bankrupting the districts, the TRS pension system, or both. Or raising local property taxes to the moon).

    At present, Springfield pols are not interested in solving the fiscal problem they have created so much as shifting the costs elsewhere onto whomever they can “roll” and letting themselves off the hook.

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