Kadner: Study peers over state’s fiscal cliff
By Phil Kadner firstname.lastname@example.org October 31, 2013 10:50PM
Illinois lawmakers tackle state budget legislation while on the House floor during session at the Illinois State Capitol in Springfield, Ill., Tuesday, Jan. 11, 2011. (AP Photo/Seth Perlman)
Updated: December 2, 2013 12:37PM
Even if Illinois legislators pass pension reform, the state is “mired in a chronic” downward financial spiral, according to a study by three University of Illinois professors.
The report, “Peering Over Illinois’ Fiscal Cliff,” contends that the state’s structural budget gap will grow from $4 billion today to $14 billion in fiscal 2025.
That assumes the state’s temporary income tax increase (from 3 percent to 5 percent) would be allowed to expire as of Jan. 1, 2015, as now planned. But even if the higher tax is maintained, the authors state that “the budget gap will continue to worsen, climbing to $7 billion in 2025.”
“I don’t know that I would call it a crisis, but it is a grim economic picture,” said Richard Dye, a co-author of the study that was written as part of the Fiscal Futures Project of the Institute of Government and Public Affairs, a public policy research organization at all three U of I campuses.
“Illinois has to recognize how serious the problem is and that it is multidimensional,” Dye said. “There is no silver bullet that is going to solve all of the state’s financial problems.
“Pension reform alone isn’t going to solve the problem, although you have to do that. Making the income tax increase permanent isn’t going to solve the problem, either.
“In fact, with pension reform and the higher income tax rate, the state’s finances will remain a mess. Of course, if you don’t address either of those issues, the financial problems of this state are obviously going to get far worse.”
Dye said it’s imperative that Illinois not only find a way to increase revenue but cut spending.
David Merriman, another report co-author and a professor of public administration at the University of Illinois at Chicago’s College of Urban Planning, explained a structural deficit for me in layman’s terms.
“It means given the resources and expenditure policies we have in place, expenditures will be more than the resources you have to support it,” Merriman said.
He said the situation could become worse in future years, in part because the state has come to rely increasingly on federal funds, its only revenue source that has grown substantially.
“But given the federal government’s own financial problems, I think it’s likely that the state will see a decrease in that source of revenue as the (federal) government comes to grips with its own budget reality,” Merriman said.
He noted that the state’s two largest areas of spending are Medicaid and education. Given the bleak picture painted by the report, the state would have to cut education funding in the future to stop the bleeding.
But Illinois already ranks dead last in the nation in the share of public school spending that state government covers. That puts more pressure on the property tax, which is the primary source of public school funding in Illinois.
“What we wanted to emphasize is that the state needs a strategic plan to address these issues,” Merriman said, echoing sentiments expressed by Dye during a separate phone conversation. “Right now, there is no plan to deal with the structural deficit. There’s a lot of talk about pension reform, but that’s only one piece of the problem.”
If the temporary income tax increase is allowed to lapse in 14 months, Illinois would lose $5 billion to $6 billion in revenue each year.
The study notes that at the end of fiscal 2013, “there were still $6.1 billion in unpaid bills from previous years that must be paid from future revenue, thus crowding out future spending on other priorities.”
The state basically has been borrowing money from vendors by failing to pay them in a timely fashion, forcing some of those vendors out of business.
“Another important effect has been a steady deterioration in the state’s credit rating,” the report notes. “Illinois now has the lowest credit rating and highest borrowing costs of the 50 states.”
That’s despite the state cutting its budget by $4 billion in recent years, reducing its workforce and increasing the number of outside vendors.
Dye, Merriman and the report’s third author, Nancy Hudspeth, seem convinced that without more cuts in the state budget, things will only get worse.
So we’re talking higher taxes, fewer services and fewer employee benefits if the state is ever going to balance its budget.
Another possibility, according to some government economists, is to change the state’s income tax system from a flat tax to a graduated tax that’s based on the amount of money a person earns.
Dye told me, speaking for himself and not as a member of the Fiscal Future Project, he would vote for a graduated income tax if it were on the ballot tomorrow.
“But that wouldn’t solve the problem because it would only give legislators more money to spend and give them no reason to make the difficult spending cuts that need to be made,” he said.
A graduated tax would require passage of a constitutional amendment in Illinois, “and I don’t think our elected officials have the credibility to convince the public this should be done,” Dye said.
While I’m not convinced Illinois’ financial situation is quite as dire as the academics suggest, it is important that residents understand the math.
Pension reform will ease the financial burden in the future and likely improve the state’s credit rating, allowing for more borrowing. But more borrowing eventually will mean a deeper financial hole.
The sales tax base can be expanded to bring in more revenue, but a wider tax likely would have an adverse impact on business.
But the fact is that our elected leaders have failed to adequately educate the electorate.
The income tax issue will be a big one in next year’s gubernatorial and legislative elections.
But people who demand a rollback of the income tax ought to understand the consequences.