Forget Greece, Look to Illinois and Beware

The state of Illinois and the nation of Greece have similar sized populations. They also face similarly dire financial problems according to a new report by Illinois' State Budget Crisis Task Force. The report calls Illinois' budget "a mess" and says unfunded liabilities in the state are "not fiscally sustainable."

The report blames the crisis on decades of poor leadership which chose accounting gimmicks over fiscal discipline. Here it's worth quoting the report at length (emphasis added):

Illinois’ fiscal condition has deteriorated for two principal reasons. First, going back decades, Illinois has “balanced” its annual cash budget by not putting aside sufficient funds to cover the increase in future pension benefits...

Second, during the good economic times of the late 1990s to mid-2000s, Illinois expanded government services, but did not raise taxes and did not put away cash reserves. The state paid for its new spending by making even smaller payments to the pension systems, borrowing heavily, sweeping special funds, and putting off paying Medicaid and employee healthcare bills until the following budget year. This chronic shortsightedness and avoidance of tough choices has accumulated to a significant structural deficit for Illinois

Richard Ravitch, a former New York city transit chief and one of the co-chairs of the budget task force, fears it will take "either social disorder or bankruptcy" before the state's leaders make necessary changes. We've seen what that can look like in Greece.

The real source of Illinois' problem is pensions. In fact Illinois "has the worst unfunded pension liability of any state." The solution to the problem is simple enough, "some type of reduction in pension benefits appears inevitable." But no one in Illinois' leadership has been able to make the change. It's easy to sell expanded programs. It's hard to explain cuts or increased taxes.

Illinois' other structural problem is Medicaid. In FY 2010, Medicaid accounted for 23 percent of the state's budget and that figure is going to grow under the Affordable Care Act. Under the best case scenario Obamacare will only raise spending 3.3 percent above the current baseline by 2019. However other scenarios suggest the increase could be as much as 20 percent by 2020.

Rather than address these structural problems, Illinois has resorted to heavy borrowing to cover its obligations. As a result, per capita debt in Illinois is the second highest in the nation at nearly $10,000 (NY is number one). And largely because of this high level of debt, Illinois' bond rating is the worst in the nation. Moody's downgraded the state most recently in January of 2012.

There is an obvious parallel between the budget issues now facing Illinois and those facing the country as a whole. Illinois has unfunded pensions and the US has Social Security. Illinois has Medicaid and the US has Medicare and Medicaid, which consume an ever increasing share of the national budget. In both cases staying afloat has been accomplished with more borrowing by short-sighted leaders. How long can this continue before "social disorder or bankruptcy" become inevitable?

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