Illinois worse off than we think

Illinois worse off than we think

By Richard Dye and Richard Winkel

Illinois' fiscal situation is brutal. A large and growing gap between spending and sustainable revenue is made worse by huge claims on future revenues from past IOUs. Eventually, the General Assembly and governor will be forced to pick losers by deciding which combination of painfully large spending cuts and tax increases to enact.

Don't look to candidates for full disclosure of the magnitude of the problem or specifics on policies scaled to address it. They seek votes with easy-sounding solutions, not by stressing how painful things will be. Still, ordinary citizens have a crucial stake in knowing how bad things are.

The University of Illinois Institute of Government and Public Affairs started the Fiscal Futures Project to provide objective, nonpartisan, forward-looking analysis of the state's budget situation. Our model of the state budget projects past revenue and spending patterns into the future.

Key to our analysis is sustainable revenue — inflows of tax collections and other receipts, not counting one-time sources like borrowing. For decades, Illinois has spent billions of dollars more each year than its revenue flows could sustain and issued IOUs to cover the difference. There are three key elements of the resulting mess.

First, there is still a big gap between spending and sustainable revenue. Our model projects a deficit of $6 billion for fiscal year 2016. Eliminating this gap would require cuts on the order of 12.5 percent of all spending or tax increases of 12 percent of all state-source revenue.

Second, Illinois' tax structure yields too little revenue growth over time compared with spending. Our model projects a deficit growing from $6 billion in fiscal year 2016 to $14 billion in fiscal year 2025. Even if painful actions are taken to balance the budget in one year, deficits will re-emerge and force additional tough choices.

Third, the accumulated pile of IOUs represent an enormous claim on future revenues. Illinois has unfunded liabilities of at least $100 billion for pensions, plus $34 billion for retiree health and another $4.5 billion in unpaid bills. Every dollar used to pay off past IOUs means one less to spend on current-year programs.

Taxpayer-voters should be wary of easy-sounding solutions. Reduce pension and/or retiree health care costs? Constitutional protections for benefits already promised retirees make this very difficult.

Increase economic growth to generate more tax revenue? But how? Economic evidence suggests there is not much a state government can do to increase overall economic activity. Also, the cost of any policy implemented will make the initial deficit larger, whatever happens to revenue over time.

Eliminate fraud, mismanagement and waste? Certainly savings should be identified by aggressive oversight, but it is nave to expect amounts sufficient to close the gap.

The magnitude of Illinois' fiscal problems requires some combination of painfully large spending cuts and tax increases. However, several things can reduce and distribute the pain.

Aggressive efforts to decrease the costs of service delivery can reduce service cuts. A process identifying public priorities should inform which services to shrink. Legislators should consider fairness — not just expected revenue — when deciding which taxes to increase. Serious attention must be paid to the revenue growth potential of any new mix of taxes.

The days of business-as-usual for state budgeting need to end. It is absolutely essential that responsible estimates of sustainable revenue be accepted as limits on how much the state can spend.

Put simply: The state should live within its means.

Our current mess is compelling evidence that buy-now-pay-later practices — like covering spending in one year by borrowing from the next, or not putting aside funds to cover the pensions earned by current employees — must end.

Richard Dye is co-director of the University of Illinois Institute for Government and an expert in local government finance as it relates to economic development. Richard Winkel is a former Illinois state senator and director of IGPA's Office of Public Leadership.

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