Thursday, July 13, 2017

Illinois' Budgetary Mismanagement Is a Ticking Time Bomb Waiting to Go Off

I love the state of Illinois. It's where I grew up, and because of that, I have good memories associated with Illinois. That's why it pains me to see what has become of Illinois as a result of years of state-level budgetary mismanagement. The latest attempt to pass a state budget show just how much of a mess it really is. Last week, the State of Illinois passed a budget. Passing a state budget is significant in this case since the State had not passed one since FY2015. This is even in spite of the fact that Republican Illinois Governor Bruce Rauner attempted to veto the bill. The veto was overturned because passing a budget was more important to the Democratic-dominated legislature than the content of the budget. One of the major reasons that Rauner vetoed the bill in the first place is because it hikes the state income tax from 3.75 percent to 4.95 percent, which is a hike of 32 percent. As high as 4.95 percent sounds, it is not even the highest state marginal income tax rate in the United States (see Tax Foundation infographic below).

If the Illinois state income tax isn't even the highest in the country, why should I be so worried about the fiscal affairs of Illinois? Because I end up worrying when I take a look at the bigger picture:

  • When combining state and local taxes, the average sales tax in Illinois is 8.64 percent, which is the seventh highest in the nation (Tax Foundation). This is exacerbated by other municipalities increasing sales tax that were effective on July 1. Illinois is also in the Top 20 list for state corporate tax rate (Tax Foundation).   
    • Here's another gem from the Tax Foundation: During the last decade (which is the time period for which there is the most recent data), Illinois experienced one of the largest migration of personal income, which is a metric that shows how people have been fleeing from Illinois. This finding can be extended into this decade since we see the downward trend in migration through 2015. 
  • Illinois also has one of the highest property taxes in the country, right behind New Jersey. One in six mortgages in Illinois are already underwater, and the State's temporary property tax freeze, which is riddled with exemptions, won't do Illinois any favors.  
  • Finance services provider WalletHub found that Illinois has the ninth highest tax burden in the United States, and also found that the average Illinois household pays more in taxes than in any other state. 
  • The Mercatus Center ranks states by fiscal condition using five main factors: cash solvency, budget solvency, long-run solvency, service-level solvency, and and trust fund solvency. Where did Illinois rank overall? In 49th place! Last year, it was ranked 47th, which tells you how bad it is getting in Illinois. Read report for further details here.

  • The Cato Institute has a Freedom In the 50 States Index, which includes both economic and personal freedoms. Where does Illinois rank on this Index? In 44th place! Fiscal, economic, occupational, and lawsuit freedoms are major drags on Illinois' ranking in this Index.
  • The Cato Institute is not the only entity that ranks states. Using data from consulting firm McKinsey, U.S. News has an Overall Best States Ranking. Illinois is ranked 29th, and that is because such features as health care, government, and economy weigh its ranking down.  
  • Another major issue with Illinois' budget is that of unfunded pension liabilities. According to the American Legislative Exchange Council (ALEC), Illinois has the third worst funded ratio of public plans (ALEC, p. 6), which is another way of saying "Illinois has a major issue with funding pensions." Pew Research, which has more a more optimistic view than ALEC, still shows Illinois having major issues (see below). 
    • Illinois' unfunded pension liabilities of $130 billion-plus have gotten so bad that Moody's downgraded Illinois' credit rating from Baa2 to Baa3. Even better, if the Chicago Public Schools (CPS) gets downgraded to B3, it will be one step away from junk bond status in large part due to lavish pensions for CPS employees. 

It should be no surprise that Illinois has the worst credit rating from Moody's amongst the fifty states in this country. Its trend of credit rating downgrading dates back at least since 2009, and does not look like it will get any better. Passing a budget for the first time in three years won't save Illinois, nor will temporary tax freezes or other tax increases. Illinois had to suspend its lottery because its budget in that bad of shape. Without some major pension reform, Illinois could very well be in bad enough shape where the federal government might bail out Illinois. Add Illinois to the list of case studies of what happens when you combine high taxes and unions that have so much power that unfunded pension liabilities that they drive the budget into the ground.

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