The state of Illinois and the nation of Greece have similar sizedpopulations. They also face similarly dire financial problems according to anew report by Illinois’ State Budget Crisis Task Force. The report callsIllinois’ budget “a mess” and says unfunded liabilities in the stateare “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 bynot putting aside sufficient funds to cover the increase in futurepension benefits…
Second, during the good economic times of thelate 1990s to mid-2000s, Illinois expanded government services, but didnot raise taxes and did not put away cash reserves. The state paid forits new spending by making even smaller payments to the pension systems,borrowing heavily, sweeping special funds, and putting off payingMedicaid 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, fearsit will take “either social disorder or bankruptcy” before the state’sleaders make necessary changes. We’ve seen what that can look like inGreece.
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 orincreased taxes.
Illinois’ other structural problem is Medicaid.In FY 2010, Medicaid accounted for 23 percent of the state’s budget andthat figure is going to grow under the Affordable Care Act. Under the best case scenarioObamacare will only raise spending 3.3 percent above the currentbaseline by 2019. However other scenarios suggest the increase could be as much as 20 percent by 2020.
Ratherthan address these structural problems, Illinois has resorted to heavyborrowing to cover its obligations. As a result, per capita debt inIllinois is the second highest in the nation at nearly $10,000 (NY isnumber one). And largely because of this high level of debt, Illinois’bond rating is the worst in the nation. Moody’s downgraded the statemost recently in January of 2012.
There is an obvious parallel between the budget issues now facing Illinois and those facing the country as awhole. Illinois has unfunded pensions and theUS has Social Security. Illinois has Medicaid and the US hasMedicare and Medicaid, which consume an ever increasing share of thenational budget. In both cases staying afloat has been accomplished withmore borrowing by short-sighted leaders. How long can this continue before “socialdisorder or bankruptcy” become inevitable?