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Who Is Second Worst?

Friday April 22nd, 2016   •   Posted by Craig Eyermann at 6:46am PDT   •  

By any fiscal measure, the government of Puerto Rico is the worst off of all state or territorial governments within the United States.

But which U.S. state or territory is the second worst off?

4-12-16 backlog breakdown

In discussing the state of the city of Chicago, City Journal‘s Aaron Renn makes a strong argument that it is Illinois:

Fiscal problems are commonplace these days among local governments, but Chicago’s are particularly grim and far predate the Great Recession. Cook County treasurer Maria Pappas estimates that within the city of Chicago, there’s a stunning $63,525 in total local government liabilities per household. Not all of this is city debt; the region’s byzantine political structure includes many layers of government, including hundreds of local taxing districts. But pensions for city workers alone are $12 billion underfunded. If benefits aren’t reduced, the city will have to increase its contributions to the pension fund by $710 million a year for the next 50 years, according to the Civic Federation. Chicago’s annual budget, too, has been structurally out of balance, running an annual deficit of about $650 million in recent years.

As dire as Chicago’s finances are, those of Illinois are in even worse shape. The primary cause, once again, is pensions, which are underfunded to the tune of $83 billion. Retirees’ future health care is underfunded an additional $43 billion. There’s a lot of regular debt, too—about $44 billion of it. And Illinois, like Chicago, has run large deficits for some time. Despite raising the individual income tax 66 percent and the corporate tax 46 percent in 2011, the state is projected to end the current fiscal year with an accumulated deficit of $5.2 billion. While California has made headlines by issuing IOUs to companies to which it owes money, Illinois has taken an easier route: it just stopped paying its bills, at one point last year racking up 208,000 of them, totaling $4.5 billion. Some businesses have gone unpaid for nine months or even longer. Unsurprisingly, Illinois has the worst credit rating of any state. Unable to pay its bills, it is de facto bankrupt.

What accounts for Chicago’s miserable performance in the 2000s? The fiscal mess is the easiest part to account for: it is the result of poor leadership and powerful interest groups that benefit from the status quo. Public-union clout is literally written into the state constitution, which prohibits the diminution of state employees’ retirement benefits. Tales of abuse abound, such as the recent story of two lobbyists for a local teachers’ union who, though they had never held government jobs, obtained full government pensions by doing a single day of substitute teaching apiece.

Although the article was published in June 2012, virtually every aspect of Renn’s argument holds true today. Since it was written, to deal with its spending problems, the city of Chicago has imposed a massive property tax increase on its residents in a bid to come up with enough money to stave off its future bankruptcy for a bit longer.

Chicago last month approved a $543 million property tax increase, phased in over four years. With Illinois residents already paying an effective property tax rate of 2.32 percent (in 2013, the most recent year Census data is available), the increase will likely displace New Jersey’s long-standing record of the state with the nation’s highest property taxes (2.38 percent on average, in 2013).

Rahm Emanuel, Chicago’s Mayor, said the move was forced by large pension obligations, eroding credit ratings, and a legacy of expensive borrowing. Chicago’s combined taxes and fees will now be the highest of any Illinois city, and its property taxes higher than Los Angeles, New York, Washington, and Houston.

In the meantime, the state of Illinois now has over $7 billion of unpaid bills as it continues to run up its spending without even having a budget as the state’s legislators, who are largely representing the interests of the state’s public employees unions, refuse to compromise on a budget that would constrain the growth of their lavish benefits in any way, demanding instead that the state follow Chicago’s example and hike its taxes to sustain their spending for a little longer.

Like Chicago, the amount by which taxes might be increased in Illinois will never be enough to become solvent given the state legislature’s spending priorities.

Featured Image:
Illinois State Comptroller

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April 2016