For those of you who have just tuned in, here’s a summary of Illinois’s fiscal situation.
- The state hasn’t passed a budget in three years.
- The ratings agencies have threatened to downgrade Illinois’s credit rating again if it fails to enact a budget.
- The next downgrade will put Illinois’s debt a junk status.
- Since many institutions are required by their governance rules to purchase only instruments of investment grade, that will greatly limit the pool of possible purchasers of Illinois’s debt.
- Illinois’s House just voted to raise the state’s personal income tax by a third.
- The state’s Senate is expected to approve the House’s tax increase.
- Gov. Rauner’s staff has said that he will veto the measure.
- The bill passed the House with enough votes to override Rauner’s veto.
- Consequently, unless Gov. Rauner can turn some votes a veto would be symbolic.
- Illinois’s constitution requires the state to have a flat tax, i.e. the state legislature does not have the power to impose a graduated income tax.
- Illinois’s constitution requires the state to pay the public employee pensions it’s promised. That’s been fully litigated and is unambiguous.
- Changing that would require a constitutional amendment which is not politically possible.
The ratings agencies might decide to downgrade Illinois’s credit rating any way. Republicans are portraying Illinois’s problems as being mostly or solely due to Mike Madigan, Speaker of the Illinois House. Democrats are portraying Illinois’s problems as being mostly or solely due to Gov. Rauners unwillingness to compromise. What compromises have they offered? A tax increase now in exchange for what later? I will gladly pay you Tuesday for a hamburger today.
I don’t think that anyone really believes that raising Illinois’s personal income tax will solve its fiscal problems. After the tax increase the rate will be within .05% of where it was when Gov. Rauner took office. The state legislature couldn’t straighten out Illinois’s fiscal problems then; it certainly won’t be able to with that tax increase.
Illinois’s basic problem is that its tax base is declining while its liabilities increase. The solutions available to it are quite limited and none of them are appealing to the legislature’s Democratic leadership in the slightest.
It should have converted all public employees to a defined contribution plan decades ago. It can give present public employees a big haircut. It can reduce the number of public employees substantially. You can see how Democrats, who derive much of their shall we say durability from public employee labor union support, would find those measures difficult to stomach.
“The ratings agencies might decide to downgrade Illinois’s credit rating any way.”
Given the arithmetic, and prior behavior, I’d say to not do so would be a breach of duty. Sometimes we make this stuff too academic or complex. Just ask, would anyone here be willing to place a significant portion of their, or their children’s, parents or friends net worth in IL obligations? I rest my case.
As pointed out, IL’ revenue and expense realities are not tenable. This situation will come to a grinding and messy halt at some point in the not too distant future. A downgrade would be a bomb going off.
Agree with Dave, but I would add that the Courts deserve much of the blame. People constantly ask me how state government can fail to pass a budget, isn’t it their job?
For those not following, when a budget initially failed to pass, numerous interest groups went to the courts to obtain orders requiring the State to continue to pay their piece of the pie and were successful to the extent they could trace their complaint to a federal obligation. For instance, state workers won their suit because they are entitled to a federal minimum wage, and the Comptroller lacks the technology to reduce salaries to that amount. They also may have won their suit because they sued in East St. Louis, not the State Capitol (Sprfld) and not where most state employees work (Chicago).
The result was that the pressure to compromise was eased with the burden placed on the backs of the minority of beneficiaries without legal recourse. Now approaching junk bond status is the new incentive to compromise, with most of the negotiating effort placed on who would get the blame if/when it goes off the cliff. The appropriate visual here is from Rebel Without a Cause.
I think tax increases are necessary, but not sufficient. No permanent fix, just a continuing series of adjustments. The courts have left the impression that a single compromise is all that it will take.