Jim Dey | When national economy stops humming, Illinois is in trouble

Jim Dey | When national economy stops humming, Illinois is in trouble

Laissez le bon temps rouler.

You can say that again — "let the good times roll." Because when the national economy stops humming like a top — as it eventually must — Illinois' dire financial status will — hard as it is to imagine — get even worse.

That's the conclusion of a recent Moody's Investors Service report on the financial status of the 50 states.

Based on its study, the research firm concluded that 48 of the 50 states "will be able to weather a moderate recession without significant adverse credit impact, in large part because of healthy reserves and inherently strong fiscal flexibility."

Two states are not prepared. One is New Jersey. Care to guess the other?

Oh, yeah — Illinois.

The potential problem is that if and when the economy slows, tax revenue falls because there are fewer people working and paying taxes. At the same time, the cost of government rises because more people need government assistance.

For example, Illinois' current unemployment rate is around 4.4 percent, about 280,000 people. During the Great Recession of 2008-09, there were an estimated 750,000 unemployed.

Moody's said both Illinois and New Jersey were "assessed as weaker in recession preparedness" because they have "lower levels of reserves relative to the potential revenue decline" and "show weakness in their pension risk scores."

For all practical purposes, Illinois has no cash reserves. Indeed, as of Wednesday, it owed $6.9 billion in more than 84,000 unpaid bills. As for its five public pensions, the General Assembly's Commission on Financial and Governmental Accountability recently forecast they will be underfunded by an estimated $136 billion by June 30.

Another estimate, based on more realistic rates of investment returns, contends the total of underfunding is much higher — about $230 billion.

Moody's based its conclusions on four factors — revenue volatility, cash reserves, financial flexibility and pension risk — and characterized the states in three ways, "stronger," "moderate" and "weaker."

The state got some rare good financial news two weeks ago when Pritzker administration budget officials reported that April tax revenues exceeded estimates by $1.5 billion.

That additional cash filled big holes in the current state budget as well as the impending 2019-20 budget, which takes effect on July 1.

But it's wholly unrelated to the subject of Moody's report — what happens in the event of a recession.

The good news for Illinois in Moody's report is that the national economy is booming and expected to stay that way.

"Economic conditions in the U.S. are strong, and the probability of a recession beginning within the next year appears to be low," Moody's stated while pointing out the obvious.

"... a downtown will come eventually," it said.

While Illinois was scored "weaker" in two of the four categories (cash reserves and pensions), none of Illinois' neighboring states (Wisconsin, Iowa, Missouri, Kentucky, Indiana and Michigan) was characterized as "weaker" in any category.

Wisconsin was Illinois' highest-rated neighbor, characterized as "stronger" in three categories, while Iowa scored "stronger" in two categories.

The report provided some eye-opening information on how effectively other states handle their finances. It found "26 states could cover a full year of revenue declines solely with reserves on hand."

By Illinois' shoddy standards, that kind of prudent financial management is inconceivable.

Indeed, Moody's reported that "if revenues declined to a degree equal to the worst one-year decline they had experienced in the past," Illinois would have to cover the shortage with midyear spending cuts and/or more tax increases and borrowing.

That's an unappetizing prospect, to say the least, but one that can be avoided if the good times keep on rolling.

Jim Dey, a member of The News-Gazette staff, can be reached at jdey@news-gazette.com or 217-351-5369.

Sections (2):Columns, Opinion
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