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Lessons from the Land of Lincoln

Saturday January 21st, 2012   •   Posted by Craig Eyermann at 9:52am PST   •  

The Heartland Institute’s Steve Stanek reports on the state of Illinois’ recent debt downgrade to now have the lowest credit rating of all the United States, back on January 9, 2012:

Despite having imposed a record 67 percent increase in the personal income tax and 46 percent increase in the corporate tax in January 2011, Illinois state government’s debt situation continues to crumble.

Credit rating agency Moody’s Investor Service on January 6 downgraded Illinois government debt, from A1 to A2, giving Illinois the nation’s lowest credit rating.

Moody’s wrote: “The downgrade of the state’s long-term debt follows a legislative session in which the state took no steps to implement lasting solutions to its severe pension under-funding or to its chronic bill payment delays. Failure to address these challenges undermines near- to intermediate-term prospects for fiscal recovery.”

A second rating agency, Standard & Poor’s, warned of a future credit downgrade by giving Illinois a negative outlook.

A lower credit rating means state taxpayers can expect to pay higher interest rates on money state government borrows.

How bad is the situation? Stanek continues:

The state owes approximately $32 billion, up from $9.4 billion 10 years ago. The state also has a $7 billion backlog of unpaid bills, which Gov. Pat Quinn (D) has said he’d like to pay off with borrowed money. Quinn’s budget office projects a deficit this fiscal year of $508 billion and a deficit exceeding 818 billion next fiscal year. These figures ignore the billions of dollars of unpaid bills.

Meanwhile, Quinn’s administration in early January announced the state’s fiscal situation is not improving despite the $7 billion annual tax increase Democrats last year imposed on citizens and businesses. Not a single Republican legislator voted for the tax increases.

Moody’s credit downgrade for the state of Illinois means that it will cost the state more to borrow money than it would if its fiscal management were more sound, as those who will lend money to the state will demand higher interest payments to compensate for the increased risk that the state will default upon its obligations.

But what is keeping the politician’s in the state’s governing politicians from being able to implement more sound fiscal management over the state government? Reuters reports:

Illinois faces heavy fiscal pressure as pension funding will rise to $5.3 billion in fiscal 2013 — $1 billion more than in the current fiscal year, according to an economic and fiscal policy report released by the governor’s office of management and budget this week.

But it doesn’t end there. The state’s ability to fund its Medicaid program will also fall extremely short. Steve Stanek notes:

“Our revenue growth is not enough to keep up with pensions and Medicaid. It creates a squeeze for everything else,” Quinn’s budget director, David Vaught, told The Associated Press.

“Under the outline presented by the budget office, virtually all state spending must remain flat for the next three years,” said Senate Republican Leader Christine Radogno (R-Lemont). “In order to achieve a balanced budget there could be no increase in education, public safety, welfare and healthcare spending.

“That’s a tall order, given that in just one area of state spending, Medicaid, current projections show that Illinois would need to spend about $3 billion more next year just to keep its current level of services and prevent the existing backlog of bills from growing.”

But why are these programs the ones most directly affected by the state’s top politicians’ inability to get their fiscal house in order?

The answer might be found in what the massive tax hike that the state’s Democratic party legislature and governor rammed through in 2010 achieved:

Meanwhile, the increase in Illinois’ income tax rates enacted a year ago has helped the state to compensate for a sharp drop-off in federal funding due to the end of the U.S. stimulus act, a state legislative commission reported on Thursday.

We’ll note that much of the federal bailout money received by Illinois was used to sustain the state’s spending in support of its Medicaid program, which the state’s top politicians used to avoid having to take steps to reign in its other spending programs, where the state’s leading politicians chose to continue their spending in the way to which they have become accustomed. This is why the state’s funding for its Medicaid programs is now in such jeopardy – thanks to the federal government bailout, the state’s politicians could more lavishly support their other priorities, leaving little money left to go to its Medicaid program once they ran out of bailout money.

In a nutshell then, Illinois’ leading politicians squandered all of the bailout money they received from the U.S. federal government, keeping their total level of spending elevated far beyond the level that the state’s taxpayers are capable of supporting, even with its massive tax hikes. At the same time, Illinois’ leading politicians bet big on its institutional status quo, enacting no meaningful changes to reign in the state’s exorbitant spending in support of its entrenched political institutions, which is now proving to have enduring consequences.

It didn’t have to be that way. Illinois’ problems didn’t just show up overnight. Andrew Thomason of Illinois Statehouse News reports on a study spanning the fourteen years from 1995 through 2009 conducted by the Illinois Policy Institute:

SPRINGFIELD — Illinois’ reputation for political corruption and government mismanagement could have cost the state billions of dollars and an income tax increase.

Illinois netted a loss of 366,616 tax-paying households between 1995 and 2009, according to a study of Internal Revenue Service figures from 1995 through 2009 released by the Illinois Policy Institute, a free-market think tank with offices in Springfield and Chicago. Those households took with them $26 billion in taxable revenue, according to the study. In 2009 alone, Illinois lost 20,725 households and their $1.5 billion in taxable income.

Ted Dabrowksi, vice president of policy for the institute, said the recent tax hike might have been avoided, if those taxpayers had remained in Illinois. “If we had more people here generating income, generating sales tax, hiring people, paying income taxes, we’d have a much better fiscal outlook,” he said.

Illinois lost taxpayers to 42 states during the 14-year period of the study, including to the border states of Missouri, Iowa, Wisconsin, Indiana and Kentucky. The higher the net loss of taxpayers for Illinois translates into a heavier financial burden for those who remain. “This is not a study to say what exactly led to people leaving, but we do note that taxes matter to people, a good, friendly environment to business matters, bad deficits and a bad governance matters to people, and people vote with their feet,” Dabrowski said.

It will be interesting to see how the number of taxpaying households in the state will have changed in the years since 2009. It’s not like the commitment of the top politicians in the state’s government to putting the state on a sound fiscal footing has improved at all.

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January 2012