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):
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
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
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
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.
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?