Friday, October 26, 2018

The Fiscal Disaster Of Illinois: The Canary In the Debt Coal Mine For The Rest of The Country

A few posts ago we did an analysis that showed how pathetically in debt we are as a nation. The total debt and unfunded liabilities of the Federal government and state governments is well over $100 TRILLION:

This debt burden has often caused us to ponder what state will go fiscally up in flames first, with New Jersey, California, and Illinois the leading candidates. 

The Mercatus Center at George Mason University recently published their annual analysis of state governments’ financial status and their analysis made the case that the state politicians of Illinois have done the best job of screwing up their state’s financial condition, i.e. the Illinois is ranked as the least fiscally healthy state in the union:
  • The state Illinois government has a backlog of $7.1 billion of unpaid bills and other budget shortfalls since it took them years to finally pass a budget.
  • It ranks 49th out of 50 states in cash solvency, i.e. it will be difficult to fund its short term expense and debt obligations going forward.
  • In 2016, the state collected only 92% of the revenue needed to cover its expenses which set off a long, arduous process to close that gap.
  • This tax revenue shortfall ranked it 46th out of 50 states when it comes to budget solvency.
  • The long term trend has seen Illinois state government funding rise on average 2% a year while tax revenue growth has grown annually only about 1% a year on average, not a formula for success over time.
  • The state’s long term liabilities are an amazing, and depressing, three times larger than the assets that are currently available to cover them, ranking it 49th from a long term solvency position.
  • While most every state has this same unfunded liability issue to deal with, since 2006, Illinois’ long term liability growth has averaged 11% per capita a year.
  • The state’s politicians have funded only about 21% of the state government’s long term pension liabilities.
  • A J.P. Morgan study found that the state will eventually have to dedicate 50% of its tax revenue just to fully fund its unfunded pension liabilities, meaning that only half of its tax revenues would be available for education, infrastructure improvement, police and fire protection, etc.
  • Alternatively, that same study found that to fully fund those unfunded liabilities, the state government would have to increase tax revenues by 25%, increase worker pension contributions by 689%, or attain pension investment returns to increase to 11.5%, a long term investment impossibility.
  • The likelihood of any of these solutions happening is very small, given the history of state politicians not fixing fundamental fiscal problems as illustrated in 2011 when the state raised taxes dramatically but the state government politicians ended up spending the increased tax money elsewhere and not making a substantial dent in the state’s unfunded liability crisis.
  • Illinois is one of only eight states that explicitly, in one way or another, constitutionally guarantee the payment of the current level of benefits, making slashing future benefits highly difficult from a legal perspective and it has one of the strictest protection of pensions of any of those eight.
  • All of this Illinois fiscal deterioration has occurred in the midst of a nine year economic growth period for the country, i.e. we have not a recession since 2009 and yet the state financial situation has gotten way worse, imagine how much faster it will go downhill when the next inevitable recession hits.
  • Even worse, despite a growing national economy, personal income levels in Illinois have grown at less than half the growth rate of the national growth rate of personal income, leaving less wiggle room to raise taxes and not hurt Illinois families and businesses than in other states with higher income growth rates.
  • On top of this mess, businesses and families are fleeing the state, leaving a smaller and smaller tax base, resulting in larger and larger tax shortfalls resulting in higher tax rates resulting in more out migration, and the death spiral is complete.
What a disaster the Illinois political class has gotten itself and its citizens into. The debt and unfunded liability hole is huge, its tax base is shrinking, and anyone reading the above details of the situation would probably agree with the Mercatus conclusion [Note: I added the emphasis]: “Illinois finds itself in a deep hole with no fully reliable ladder to climb out. Some even think that the only solution to their mess is to file for bankruptcy and ask the Federal government to bail them out, an event with no legal precedent. There is not one panacea solution for the state to move forward. Their recent attempt to reform pensions through offering buyouts signals that they’re thinking beyond short-term fixes like tax increases, but more work needs to be done in this direction. Illinois needs long-term solutions that will involve regulatory, tax, and pension reform.”

No way out. Bankruptcy. The need for long term solutions. Given that it took decades to get in such a bad position it is highly likely that the politicians in the state will not be able or willing to find a long term solution which will result in the now way out scenario and avoid eventual state bankruptcy. This will likely result in dramatically reduced pensions and benefits to government retirees, more increased taxation and everyone loses.

But going back to the original post on fiscal dangers across the country referenced above, Illinois is the so-called canary in the debt coal mine. Why we can all be thankful that most of us are not living in a state in as dire a situation as Illinois, with the exception of a few states like New Jersey, California, and Connecticut that are not much better than Illinois, as we outlined in the post above, the country as a whole has a debt hole of existing national debt and unfunded liabilities of over $100 trillion. 

All of which means that these “no way out, bankruptcy, and the need for long term solutions” conditions await us all in the not too distant future, given the ineptness, lack of ability, and lack of courage of the American political class at all levels of government.

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