National editorials or op-eds on the fiscal mess here in Illinois always catch my eye and this one at the Wall Street Journal by economist Orphe Divounguy, proposing a “simple solution” to Illinois’s problems, was no exception:
Shortly before Puerto Rico’s bankruptcy filing, The Wall Street Journal described “an exodus of workers, retirees and entire families†fleeing a deepening economic crisis. “For years, Puerto Rico borrowed more—and incurred higher fixed costs—to buy time to stave off deeper economic overhauls,†according to the Journal report. Creditors and analysts said Puerto Rico’s problems were aggravated by “government overspending and promises to unions for employee benefits that officials knew they wouldn’t have the resources to properly fund.â€
The description also fits Illinois, but it doesn’t have to. Illinois’s public pension payments already consume nearly a third of the state budget, yet the unfunded liability—which the state currently pegs at $137 billion, though others put the figure much higher—continues to rise. Local government services are also being squeezed by pensions, contributing to rising property taxes that are the second-highest in the nation. Since 2000, Illinois has increased pension spending by more than 500% but cut by a third services that help students pay for college, protect children from abuse, aid the poor, and fight disease.
Moderate reforms could stabilize Illinois’s five state-run and hundreds of local pension funds, but politicians have consistently refused to consider them, preferring instead to increase taxes steadily. Illinois has a culture of trying—and failing—to tax its way out of its problems. In 2011 then-Gov. Pat Quinn approved a temporary tax hike aimed at making a dent in the state’s $8 billion in unpaid bills. By 2014, Illinois still had a $6.6 billion bill backlog, and lawmakers were calling for families and businesses to give up more money. Another permanent income-tax increase came in 2017, but again more taxes failed to solve Illinois’s problems.
The problems, in fact, got worse. In his freshman year, Gov. J.B. Pritzker signed into law 20 new taxes and fees totaling nearly $4.6 billion, including a doubling of the gasoline tax. Now Mr. Pritzker wants a progressive income tax he claims will really solve the issue. He’s asking voters to give him a green light on Nov. 3.
Mr. Pritzker is wrong to tell voters that 97% of them “will not see an increase.†Because when voters decide whether to push forward his progressive tax, they won’t get to vote on rates. As the Illinois Policy Institute reported, solving the pension issue would require a progressive income-tax hike of $10 billion. Mr. Pritzker’s current plan to tax $3.7 billion out of the state economy dedicates only $200 million to pensions.
There is hope for the people of Illinois. State pensions can be fully funded, Illinois taxpayers can save $50 billion over 25 years, and dollars can be freed to support their eroding public services. Policy makers can finally shrink Illinois’s pension liability by reducing the main driver of its growth: the cost-of-living adjustment, or COLA. Currently, the COLA doesn’t reflect any actual cost-of-living increase, since it isn’t pegged to inflation. By simply replacing the existing guaranteed 3% compounding postretirement raise with a true COLA pegged to inflation, among other modest changes, Illinois can save $2.4 billion in the first year alone. No current retiree would see a decrease in his pension check. Current workers would preserve their core benefit.
That “simple solution” would require Illinois’s state constitution be amended. That is not in doubt. The issue has been fully litigated.
Democrats control the state’s house and both houses of Illinois’s legislature and the Illinois Democratic Party derives much of its power from the support of Illinois’s public employees’ unions. The required amendment has never been proposed by any sitting politician for a simple reason: it would be political suicide. Telling a politician that the first step on the road to recovery is committing suicide is not much of a sales pitch.
I don’t expect that Illinois’s fiscal problems will start being solved until the state can no longer borrow (because no one will lend to it) and raising rates does not increase revenue either due to taxpayer flight or non-compliance. Then the state will actually default. That will be an adventure.
When Illinois can no longer borrow, I would expect Madigan to introduce a bill that in so many words require banks in Illinois to lend money instantly or be shut down immediately, Obviously the bill if passed (or even if it would go into litigation on constitutional or other grounds, at the state and likely federal grounds and probably reversed, but in the meantime Madigan would have the money and it’ll be a cold day in hell before they would repay the forced loan. You would know better than I if Madigan thinks he could pull it off.
You can’t bully the big banks and that’s what we’re talking about. They’ll leave Illinois and, with things as they are, that means that Illinois will largely be without banks.