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As the Greek
default (and it is a default no matter what they end up calling it) is
finalized this week, the consensus seems to be that failure to reach a deal
would cause a global financial apocalypse.
That may be
true. And if it is, why aren't we more worried about Illinois? It's more or
less the same size as Greece, its finances are in the same generally
catastrophic shape, and its leaders are just as feckless and dishonest. It
owes tens of billions of dollars to various investors and stakeholders and
will clearly have to stiff many of them at some point. The following article captures
the "failed state" dilemma perfectly:
Dripping
with red ink: Will anyone fix Illinois' budget mess?
The question
isn't whether Illinois' finances are in dreadful shape, it's how to fix the
problem. Or perhaps more accurately, will legislators have the political will
to fix it when they return to Springfield for their spring session?
Even though
the legislature and Gov. Pat Quinn last year imposed a temporary 67 percent
state income tax increase, Quinn's office expects to have a $500 million
budget deficit this year.
Quinn is
calling for a 9 percent cut in most areas of state government, except
education and health care. But even with cuts at that level, the state would
have a projected $800 million budget deficit for fiscal 2015, the year when
most of the tax hike expires.
Quinn's
budget spokesman, Kelly Kraft, said the state's fiscal situation is not
pretty.
"These
projections clearly demonstrate that action must be taken to control not only
Medicaid costs but also (pension) costs, or all other areas of government
will continue to be squeezed," Kraft said.
Looking at
the bigger picture, the state has a backlog of about $8.5 billion in unpaid
bills and owes about $27 billion in outstanding bonds. And then there's the
roughly $80 billion owed to the state's public employee pension funds.
Now,
legislative leaders and Quinn are floating ideas to cut the two areas that
account for the biggest chunks of the state budget -- pension contributions
and Medicaid.
In the
proposed $33.7 billion budget for fiscal 2013, the state's pension payment
will be $5.3 billion, and Medicaid will cost taxpayers about $7 billion.
Proposals
include reducing the benefits or the eligibility for Medicaid. On pensions,
ideas include decreasing the benefits and increasing the contributions for
current employees. A new pension system was approved last year, but it's only
for new employees, and there's debate on whether the benefits for existing employees
can legally be changed.
One of
Quinn's ideas for reducing the state's pension costs is to shift the burden
somewhere else: to local school districts.
"About
21 percent of what the state puts in ... is for state employees," Quinn
told reporters earlier this month. "More than half of the money we
contribute every year is for teachers who are outside of the city of Chicago
-- suburban and downstate teachers."
Supporters of
the idea say it would make school districts think twice about giving
employees big raises at the end of their careers to boost their pensions.
School districts would have some skin in the game if they had to pay for
those pension boosts, rather than the state, the supporters say.
Opponents
argue that shifting costs to local school districts isn't real reform, and
would just force them to increase local property taxes.
Improving the
picture won't be easy when the legislature reconvenes Jan. 31, particularly
in an election year, when politicians might find it difficult to cut services
for constituents or hurt the feelings of unions that represent state workers.
To summarize,
even after a massive tax increase Illinois is looking at a half a billion
dollar deficit. That actually sounds manageable in the scheme of things --
not even a billion dollars, chump change in this inflation-ravaged world. But
the annual deficit is less of a threat than all those accumulated
liabilities: "Looking at the bigger picture, the state has a backlog
of about $8.5 billion in unpaid bills and owes about $27 billion in
outstanding bonds. And then there's the roughly $80 billion owed to the
state's public employee pension funds."
The reported
deficit, in other words, doesn't include all the stuff that should have
appeared in past budgets but was hidden in order to get through the next
election. How a state with a constitutional mandate to balance its budget can
do this in the first place -- and how an "unpaid bill" can be
excluded from the annual budget -- is a question for future prosecutors. But
for investors it's a clear sign that some sort of default is coming.
Why then
would anyone buy an Illinois municipal bond, or accept a state contract that
required future payments, or move a business to the state, or keep a business
in the state, or do anything else that required faith in the willingness or
ability of the state to pay its bills? The only possible answer is that
Illinois isn't Greece; it's Spain or Italy, an
entity so big and important that its failure is inconceivable. When it hits
the wall, Washington will have no choice but to step in and cover its
unfunded pensions and teacher salaries and muni bond interest. In the same
way that a Spanish bond is really a German bond because Germany has no choice
but to make good on them, the big insolvent US states are wards of the
central government.
The bottom
line effect of all this stepping up and bailing out is to exchange a
solvency/debt crisis for a currency crisis in which the markets at some point
figure out that failed states are so numerous and their needs so great that
the printing presses will never stop.
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