Illinois Financial Crisis: State Debt, Pension Liabilities, and Tax Hikes Led to Economic Decline

Illinois Financial Crisis
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The Illinois financial crisis is not yet over. The state government is in debt, with $9.0 billion in unpaid bills that the state has already received, and $7.5 billion in unpaid bills that the government has yet to receive. So, the total unpaid bills for Illinois add up to $16.5 billion.

This giant backlog of bills tripled over two years because of a stalemate between Republican Governor Bruce Rauner and Democrats who controlled the General Assembly. During that time, the two sides were unable to pass a constitutionally mandated budget. That situation only changed in June 2017, when the governor and lawmakers agreed on a budget and they approved income tax and corporate tax rate increases.

The tax hikes on their own, however, are not expected to solve the Illinois budget crisis.

During the two years without a state budget, social services and public education in Illinois were affected the most. A United Way survey stated that about 69 percent of Illinois social service agencies received little or no state funding for fiscal-year 2017. The agencies included those that deal with homelessness, childcare, and mental health.

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There were also more than 1,500 job cuts at the state’s public universities and community colleges.

Abdon Pallasch, spokesman for Democratic state Comptroller Susana Mendoza, said that the state’s payments toward pensions and school aid would help lower the bill backlog to the $15.0-billion range.

State lawmakers also authorized the sale of up to $6.0 billion of general obligation bonds in order to pay bills from vendors and service providers. The deadline for issuing bonds was December 31, 2017.

The hope was that these moves would stabilizes the Illinois government’s credit rating.

Pension Debt May Lead to Illinois financial crisis

From 2015–2016, the Illinois state government’s pension program added more debt than the entire budgets of 25 U.S. states. In that year, Illinois’ 671 pension obligations added $17.0 billion in unfunded liabilities, bringing the total liabilities to $185.0 billion.

The state’s teachers’ retirement fund carries the most significant amount of pension debt. It is estimated to have $71.4 billion in unfunded liabilities. Director Dick Ingram views the main concern to be the earlier “Tier 1” pensions, which cost more than what was paid into the fund.

Fitch Ratings, Inc’s 2017 state pension report says that Illinois had the highest state pension liabilities among all 50 U.S. states. The state’s pension liabilities amounted to 22.8 percent of Illinois residents’ personal income at the end of fiscal-year 2016. That is in contrast to a median of 3.1% for all U.S. states. According to Fitch, Illinois’ net pension liabilities were $151.5 billion at the end of fiscal-year 2016.

Previously, pensions were a way to attract workers, but they have become no longer affordable when governments don’t budget enough money for the pension funds.

Illinois’ Sluggish Employment and Tax Hike Spread Economic Decline in the State

The  population of Illinois has shrunk for four consecutive years, and the workforce has also been declining. The state’s economic growth has also dragged, compared to other U.S. states.

The primary factors for Illinois’ slow growth in real gross domestic product (GDP) have been labor inputs and labor productivity. GDP growth depends on a production process that transforms labor, capital, and technology into economic output. If more people leave Illinois, and/or the remaining workers put in fewer hours, the state’s labor input will stagnate or shrink.

As part of the Illinois financial crisis, the state has experienced investment reductions, leading to lower wage growth. This has resulted in fewer people wanting to live and work in the state.

Moreover, tax hikes have been increasing the economic woes in Illinois. In the past few years, the state’s personal income tax rate moved from five percent down to to 3.7 percent, and then up again to 4.95 percent. Further, the state ranks second-highest in real estate taxes.

Also, the state has higher workers’ compensation insurance rates than do the surrounding states.

All these factors have added to a decline in income, an increase in unemployment, and overall economic decline in Illinois.

Sources:

Illinois Is Still Facing the Nation’s Worst Budget Crisis,” Slate, October 10, 2017.

Illinois budget crisis: Billions in unpaid bills not forwarded for payment,” The Seattle Times, October 10, 2017.

Illinois’ unpaid bill backlog hits a record $16 billion,” Reuters, September 19, 2017.

Illinois’ pension debt grew more in one year than half of states’ entire budgets,” Illinois News Network, October 12, 2017.

Fitch: States’ net pension liabilities rise in FY 2016; Illinois tops list,” Pension & Investments, December 12, 2017.

WHAT’S DRAGGING DOWN ILLINOIS’ ECONOMY? ,” Illinois Policy, December 20, 2017.

OUR VIEW: In 2018, Illinois needs to stop the decline,” The Times, December 29, 2017.

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