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 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.
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 $)|
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.