Tom Kacich: Moody's, Rauner differ on state of the state
Moody's Analytics has a different take on the state of the state of Illinois than the one Gov. Bruce Rauner is expected to offer today.
Its newly released economic forecast for the state, delivered in dry, nonpolitical tones, doesn't demonize organized labor or state employees for the poor financial condition of the state government.
In fact, when it addresses what it calls the state's "failed" fiscal policies and its "precarious" financial condition, Moody's puts the onus on the taxing and spending of "previous governors and legislatures.
"The state's budget has been unbalanced and unsustainable for many years," Moody's said in a 41-page analysis to the Legislature's bipartisan Commission on Government Forecasting and Accountability. "The state's fiscal condition has deteriorated for two principle reasons.
"First, for decades it has balanced its annual cash budget by not putting aside sufficient funds to cover the increase in future pension benefits, causing unfunded liabilities to increase. Second, when the state economy was performing well from the late 1990s into the mid-2000s, Illinois expanded government services but did not raise taxes or put away cash reserves.
"The state's fiscal condition was poor going into the Great Recession, which had a devastating effect on revenue and increased demand for services."
In another section, Moody's takes a look at "right to work" laws, a legislative initiative that Rauner has promoted as a local option, but not on a statewide basis. With right to work, employees in unionized workplaces can't be forced to pay union dues, although they enjoy union benefits. Eventually, a union's finances and influence erode.
Right to work laws reduce union membership, Moody's notes, but less clear is whether they actually contribute to economic growth.
"Since laws that hurt unions shift the balance of power from employees to owners, they tend to erode wages and lead to a more uneven distribution of the gains of economic growth," Moody's said. "Consequently, even if the impact of right-to-work laws is positive in the short run, it can diminish over time because of the downward pressure on incomes."
In another blow to the Rauner narrative that Illinois is a bad state for business — he showed a chart last week that ranked Illinois 48th among the states — Moody's concludes that "Illinois' business climate outshines its regional rivals," although it acknowledges that "the state's shaky finances have some firms questioning whether they want to expand in the state or elsewhere."
Moody's says that while the fiscal crisis and the possibility of higher state taxes "are expected to subtract modestly from growth, Illinois is unlikely to lose its appeal for corporate headquarters and companies that need highly skilled workers and are willing to pay for the top talent."
Further, business costs in Illinois "are only marginally higher than they are nationally," concludes Moody's. "Costs are now lower than those in Wisconsin and Ohio but higher than those in neighboring Missouri and Indiana. Firms in Illinois tend to pay less in taxes, and their utility costs are below average, but labor is on the expensive side. By and large, though, business costs are pretty favorable and lower than those in states that have similarly high metropolitan areas with unique features that appeal to businesses such as California and New York."
There is no doubt that Illinois has both short-term and long-term economic challenges, Moody's says, including negative demographic trends, a soft manufacturing economy and a growth disparity between downstate and the Chicago area.
"Lake County and Chicago are powering the state economy as strong growth in service industries more than compensates for sluggishness in the goods-producing arena," which is generally downstate. Moody's says that while manufacturing's share of employment is 10 percent statewide, it is 13 percent outside of Chicago and especially important in Peoria, Decatur and the Quad Cities.
Of particular interest to East Central Illinois were the following observations by Moody's:
— "(F)eatures that appeal to businesses in Chicago are not evident elsewhere, even where there is top talent. The University of Illinois in Champaign, for example, has one of the country's top engineering schools, but the startup ecosystem needed for graduates to turn research ideas into private companies is small. The entrepreneurial outlets for graduates are much better in Chicago, which is Champaign's largest destination for out-migration. The share of the adult population in Champaign with at least a bachelor's degree stacks up poorly with that in other Midwest college towns."
(According to the Census Bureau, 49.4 percent of Champaign residents and 55.3 percent of Urbana residents have a bachelor's degree or higher. That compares unfavorably with West Lafayette, Ind., 71.4 percent; Bloomington, Ind., 56.6 percent; Iowa City, 58 percent; Madison, Wis., 53.8 percent; Ann Arbor, Mich., 70.6 percent; East Lansing, Mich,, 68.5 percent; and State College, Pa., 66.3 percent).
— "While the threat posed by Illinois' poor fiscal health extends to all parts of the state, Champaign and Springfield have the most to lose because of their outside dependence on state government for jobs and income. The University of Illinois faces greater financial and political pressure than its peers. The threat of budget cuts and shortfalls in staffers' pension funds is making it difficult to retain and attract top talent.
"Although the university increasingly relies on other sources of funding to supplement state appropriations, its limited ability to withstand further reductions has hurt the school's credit rating and increased its borrowing costs. Faculty and staff health care costs keep rising, and the university is approaching an upper limit on tuition rates and the 4 percent increase in state funding that the university is requesting next fiscal year has almost no chance of being granted."
Tom Kacich is a News-Gazette editor and columnist. His column appears on Wednesdays and Sundays. He can be reached at 217-351-5221 or at firstname.lastname@example.org.