State Budgets

Lockdowns Accelerate Fiscal Crisis in Illinois

In a recent article from The Wall Street Journal, Doug Cameron discussed how the stringent pandemic lockdown in Illinois has shifted consumer spending in the Quad Cities region across the Mississippi River into Iowa. While the COVID-19 shutdown has taken an especially harsh toll on the Land of Lincoln, this border competition is nothing new.

Decades of irresponsible tax and fiscal policy have driven residents and businesses out of Illinois. State leaders in Illinois have ignored all the long-term warning signs. Unfortunately for Illinois, the long-term consequences arrived much sooner than expected.

Many business owners in Illinois see residents leaving to shop, dine out and do business on the Iowa side of the Mississippi River. They see local tax bases and revenue shrinking in Illinois as Iowa remains prosperous.

This is not the fault of COVID-19, however. Illinois has seen net outmigration since 1985, as residents leave for Florida, Texas, Wisconsin, Indiana, Arizona and other states with lower tax burdens and better government services. The research conducted in the annual Rich States, Poor States report shows that Illinois has some of the heaviest tax burdens in the country since 2008.

The Illinois government has placed itself on the wrong side of the Laffer Curve, and, even as residents leave by the thousands, state leaders continue raising taxes and increasing spending to record levels. State leaders have also overpromised generous pensions and other postemployment benefits (OPEB) to public sector workers without adequately funding those promises.

Research from ALEC shows that by fiscal year 2018, Illinois had $62 billion in bonded obligations, $64 billion in unfunded OPEB liabilities, and $359.6 billion in unfunded pension liabilities. That is $38,000 of pension, OPEB, and bonded debt for every man, woman, and child in the state of Illinois. This debt crowds out government spending on essential services and stops any opportunity for tax cuts.

The fiscal irresponsibility of Illinois has not gone unnoticed. Since 2009, the Illinois credit rating has been downgraded 21 times by Moody’s, S&P, and Fitch, sinking nearly to junk status for all three rating agencies with a BBB-/Baa3- in June 2017.

Fast forward to 2020, and the economic shock of mandatory state-wide shutdowns has caused massive investment losses to state retirement systems as Illinois faces a $6.1 billion budget deficit. The abrupt economic downturn after one of the greatest economic booms in history brought Illinois to its knees. Now, state lawmakers in Illinois are asking Congress for a $44 billion bailout to cover pension expenses, budget deficits, and $10 billion “no strings attached.”

There was great uncertainty as to how Illinois would deal with the long run effects of reckless tax and fiscal policy that arrived very quickly. Thanks to the CARES Act, Illinois was the first to access the Federal Reserve’s newest lending facility and sold $1.2 billion in general obligation bonds to the Fed (which mature in June 2021).

The Fed also gave Illinois a favorable borrowing rate, with interest costs only at 3.8% above the rate a AAA rated state would borrow (normally a bond issuer with Illinois’ credit rating of “just above junk status” would borrow at 4.5% above the rate a AAA rated state would borrow). Illinois is also hoping for an additional round of stimulus money from Congress as well.

While Springfield is getting support from the Federal Reserve, Illinois families and businesses still under lockdown are seeing their livelihoods eroded by punitive taxes and residents leaving the state for opportunities elsewhere. It’s time for real reform in Illinois, not another bailout.

In Depth: State Budgets

Smart budgeting is vital to a state’s financial health. The ALEC State Budget Reform Toolkit offers more than 20 policy ideas for addressing today’s shortfalls in a forthright manner, without resorting to budget gimmicks or damaging tax increases. One way to stabilize budgets over time is to embrace…

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