Where does Illinois go from here?

Monday, May 17, 2010

To Eric from Dennis:
We have seen Greece, and it is us.

When Greek mobs were rioting over government austerity measures needed to secure sufficient international loans to keep the country afloat, the discussion on CNBC immediately turned to whether the indebtedness contagion would spread to the United States.

Guest Steve Forbes quickly answered that we don't have to wait to find out. We've already got our own Greeces; they're called Illinois, California, New York and other states.
As we now know, European countries and the International Monetary Fund (that includes us) came to the last minute rescue of Greece with nearly $1 trillion in aid. But who will bail Illinois out of its own Grecian-like insolvency? Indiana or Wisconsin? The federal government, already swimming in its own debt? Forget it.

Many other states have spent themselves into hock, but few into the same depths as Illinois.

Contrary to fans of a tax increase, the problem hasn't been on the revenue side. State revenues annually have increased or held steady for the past decade until the recent recession. They just haven't grown as fast as spending.

According to the non-partisan Civic Federation, total Illinois revenues (inflation adjusted) have increased to $54.7 billion in fiscal year 2010, from $35.3 billion in fiscal 2001. That's an astonishing 51 percent increase.

As healthy an increase as that's been, state spending has sucked up every penny of that increase, and then some. During the same period, total appropriations have increased 36 percent, to $54.6 billion from $40.2 billion.

With this history, increasing revenues, especially through the huge income tax increase sought by Gov. Pat Quinn, would be like buying a bottle for an alcoholic. It doesn't solve the underlying problem.

To Dennis from Eric:

Whether or not the similarities between Greece and economies in the U.S. are portentous, as you suggest, or superficial, as I believe, is irrelevant to the big question now facing us in Illinois: How do we bail ourselves out of this mess?

First, it helps to understand the problem. If we look a little closer at the Civic Federation's recent 102-page “Rehabilitation Plan for the State of Illinois,” inflation-adjusted general-fund revenues (income from taxes and fees) have actually fallen 5 percent in the last decade.

Inflation-adjusted state spending is up only about 10% over that same time, again per the Civic Federation. And when you also figure in population growth -- which seems fair enough, right? -- you find that state spending is down 6.7%, according to the Center for Tax and Budget Accountability.
The Federation of Tax Administrators says 45 of the 50 states collect a greater percentage of personal income in taxes and fees than Illinois does. Our per-capita state and local tax rate is 9.3%, lower than in 1977 and just the 30th highest in the nation, according to the most recent data from the Tax Foundation.

My point: Even though Illinois has obviously been living beyond its means -- the projected budget deficit is about $13 billion --- it isn't a comparatively high-tax or high-spending state.

Even the Civic Federation, which is non partisan but also pro-business and conservative in outlook, concedes that significant tax increases -- a 66 percent hike in our very low state income tax rate and a repeal of the income-tax exemption on retirement benefits to name two -- must be part of comprehensive budget reform if we're to avoid severe program and service cuts.

Do you agree?
To Eric from Dennis:

No, I don't. You unwittingly illustrated the problem: confusion over the budget numbers. The “general-fund revenues” you cited are only part of the state's total revenues. Include all revenue sources, then state income indeed has grown by 51 percent from 2001 to 2010, according to the Civic Federation.

From the spending side, total state appropriated expenditures in all seven state funds (e.g. general, highway and trust) increased by 39 percent from 1998 to 2008, according to an Illinois Policy Institute analysis of state comptroller data. Overall per capita spending (inflation adjusted) increased to $4.600, from $3,500.

Significantly, the fund that pays interest on our debt ballooned to a staggering $4.5 billion, from $1 billion. This crushing indebtedness caused our bond rating to fall so low that only California's now is worse.

In good times and bad, state spending grows beyond our ability to pay. Every increase in revenue, whether from taxes or Washington, has generated an equal or greater increase in spending. Adding more taxes on even a “moderate” state tax burden won't solve anything. But it will erode our ability to retain and attract jobs.

The Civic Federation now has withdrawn its support of Gov. Pat Quinn's whopping tax increase because his budget “calls for borrowing billions to pay for operations while continuing to ignore a massive backlog [soon to hit $6 billion] of unpaid bills.”

As taxpayers, we should demand that the governor and Legislature spend our money more prudently and intelligently before we give them any more.

To Dennis from Eric:

It's quite true that long-term, bi-partisan lack of prudence on the part of our lawmakers has left the state in a dreadful financial fix. But trying to punish them like an indignant father disciplining wastrel children by withholding their allowance won't get us out.

Nor will sowing rage and panic by cherry picking numbers to mislead people into believing taxing and spending are out of control in Springfield.

They're not.

Per capita or as a percentage of our state's economy, we're a comparatively low tax and low spending state, and we're not growing in the “general” area -- the area the legislature controls and where all serious budget discussions focus.

Look at your own numbers: If spending truly were up 36 percent and revenue were up 51 percent, we'd be running a surplus and not worrying about what will become of the elderly, the young, the sick and disabled, the poor and others who rely on state programs.
But enough fun with data. I've posted my sources here, you post yours here and let the wonkiest man win.

Nearly all sources will agree, however, that we’re a low-responsibility state. Too often and for too long, our leaders have paid for today's programs and services with tomorrow's money.

So now what?

Civic Federation head Laurence Msall told me last week that, for Illinois to get current on its obligations simply by cutting spending, we'd have to reduce state-funding by roughly 50 percent on all programs, which in turn could jeopardize federal funds for Medicaid and education.
Even the Civic Federation “rehabilitation plan” -- which Msall still promotes, by the way -- with its tax hikes and possibly unconstitutional pension reforms , will require at least a 12 percent overall state-spending cut.

In short, there's no painless way out. How do you want to share the pain?

To Eric from Dennis:

We can agree that we're in such deep trouble that no single action will solve the crisis, certainly not this year. But we can make a reasonable start. I took your side and supported a tax increase in a Jan. 15, 2007 column. But things have gravely worsened.

So, here's the deal: I'll support a 10 percent income tax increase-not the draconian 33-percent increase that Gov. Pat Quinn wants, or the 66 percent increase that some say we need-if you support a 10 percent spending cut. Or cut spending to, say, 2007 levels and (cutting my own throat) eliminate the costly tax exemption for retirement and Social Security income, as the Civic Federation urges.

Yes, I know that would reduce spending more than it would increase income. And, yes, those cuts would inconvenience some, and create hardships for others. But going back to spending levels we had three years go is not unreasonable.

It would immediately demonstrate our seriousness about righting our financial ship, help restore lender confidence and reduce the cost of borrowing. Paying less interest would make more money available for educational and social service programs. It might even convince ourselves that we can do whatever else is necessary. Such as capping spending, as the Illinois Policy Institute suggests, at the previous year's budget, multiplied by the combined rate of inflation and population growth.

To Dennis from Eric:

The problem with these gimmicky ideas --- specific percentage reductions, cuts back to 2007 budget levels and so on---- is that they whack at vital, efficient, necessary programs with the same wildly swinging meat cleaver as they whack at bloated, arguably superfluous programs.

They abandon the concepts of priorities and performance, concepts that ought to be integral to any government undertaking.
So no deal.

But I would like to see state officials demonstrate their seriousness of intent by performing surgery rather than butchery on the budget. Eliminating legislative college-tuition waivers and would be a good-faith start.

If I see a good-faith effort, I’ll be OK with a tax hike -- our flat-rate income tax is the lowest among states that levy a flat rate -- so we can pay off our obligations and meet critical human-service needs while bringing spending and revenue into balance and staving off alarmist comparisons to Greece.

Something tells me that lawmakers won't take your deal or mine in 2010. And that the numbers -- yours and mine -- will continue to look worse and worse

I'm sure we agree on that, as well.