Friday, January 14, 2011

Illinois and Its Financial Disease

The Prairie State pestilence: Pensions, budget woes spread

By John F. Wasik (Reuters)
Author, The Cul-de-Sac Syndrome

Protesters demonstrate during a rally against government cutbacks for social services in Aurora, Illinois, June 18, 2009. REUTERS/John GressThe fiscal malady that plagues Illinois — and its painful treatment — may be coming to a state, county or municipality near you.

What will cure this spreading pox on the populace? Higher taxes, lower spending and that rare commodity: political honesty.

I feel the pain since I live in Illinois and will pay higher taxes. This couldn’t be more personal to me. My daughters’ school district is owed state money and has fired teachers. My father’s teachers’ pension fund (among others) has been methodically underfunded for years. I went down to our state capitol last year with other University of Illinois alumni to lobby the state legislature to pay more than $400 million in unpaid education bills.

The Prairie State’s teaching moment was ignited by the Illinois legislature’s passage on January 11 of a tax increase that will raise $6.8 billion for state coffers and impose spending limits. The personal income tax will climb from three percent to five percent; the corporate levy from seven percent from 4.8 percent. It’s a mere finger in the dike as the state still needs to borrow to cover pension obligations. The rates may ratchet down over time.

Sad as this may sound, the Chicago Cubs have been managed better than the Illinois budget. The state was running a $13 billion budget deficit, which could balloon to $15 billion; it was in the worst fiscal shape of any state. Its shortfall was nearly twice that of California, which has nearly three times the population.

As a taxpayer, I’m outraged that things got this bad. As a citizen, though, I still want education to be fully funded, public-employee pensions to be honored and my state to invest heavily in infrastructure and job-creating programs.

While Illinois is a poster child for horrendous fiscal management, other states and municipalities are hurting in a similar way. Banking analyst Meredith Whitney says 50 to 100 municipalities may file for bankruptcy. JPMorgan Chase CEO Jamie Dimon recently echoed that concern.

In good times, many governments were generous with retirement and health benefits. They kept doling out the goodies with the assumption that widespread economic growth and a robust stock market would bail them out.

Yet the best intentions were declared on the road to hell. The stock market tanked three times in the last decade and took down public pension fund returns. Bond yields are abysmal. The ongoing housing crisis pummeled nearly every state by reducing income, property and sales tax revenues. Public pension payments were grossly inflated by bumping up salaries and bonuses in the final years of service.

The recession zapped state revenues by more than 30 percent between 2008 and 2009, the U.S. Census Bureau reported. That meant more teacher layoffs, furloughs for university professors and cutting services in countless communities. I went through my local school district’s budget with other citizens with a fine-toothed comb last year. It was like picking fleas off a lion.

The federal stimulus plan of 2009 helped somewhat, but not enough to offset a collective $130 billion state budget shortfall, according to the Center for Budget and Policy Priorities. Some 40 states project budget gaps totaling $113 billion for next year and 46 states posted a deficit last year.

With the new bailout-averse Congress in place, it’s unlikely that we’ll see another major stimulus plan being passed that will ease the burdens on state houses and city halls. In the interim, sacrifices will abound.

Pension formulas will be downgraded. Benefits will be cut. Public employees will have to dig deeper into their pockets to pay for pension and health-care benefits. And taxes will certainly be raised if cuts fail to restore balance.

Not all taxes need to be onerous and unfair, though. It’s once again time to consider a tax on carbon, raising a motor fuel tax that hasn’t kept pace with inflation and a tax on financial speculation.

If I believed that states could “grow their way” out of their fiscal messes, I’d say wait on new taxes. Yet that won’t likely be the case in most states where jobs have been permanently vacuumed away by emerging economies. The best tax would be one that spurs a reinvention of the economy while creating private-sector employment and channels money back into communities. It would be a hallmark of social capitalism.

If only Illinois (and many other states) wasn’t too broke to take this next step. It would restore my faith in Prairie Populism. I might even root for the hapless Cubs again.

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