The Land of Lincoln is now more like the Land of Obama. Illinois has been running toward the brink for years under Democratic control. Now it may finally be there despite the fact that a Republican is in the State House:
The state's budget mess is so dismal that its credit may soon take a historic (the bad kind) hit.
From ABC News:
Illinois is on track to become the first U.S. state to have its credit rating downgraded to “junk” status, which would deepen its multibillion-dollar deficit and cost taxpayers more for years to come.
S&P Global Ratings has warned the agency will likely lower Illinois' creditworthiness to below investment grade if feuding lawmakers fail to agree on a state budget for a third straight year, increasing the amount the state will have to pay to borrow money for things such as building roads or refinancing existing debt.
The only real solution at the moment is to hit the citizens of Illinois with higher taxes. The Republican governor and Democratic legislature are fighting over this, and that chaos is being blamed for the credit rating peril. The real problem, however, is looming pension debt:
Ratings agencies have been downgrading Illinois' credit rating for years, though they've accelerated the process as the stalemate has dragged on between Republican Gov. Bruce Rauner and the Democrats who control the General Assembly.
The agencies are concerned about Illinois' massive pension debt, as well as a $15 billion backlog of unpaid bills and the drop in revenue that occurred when lawmakers in 2015 allowed a temporary income tax increase to expire.
Unfunded pension liabilities aren't unique to Illinois. California — the nation's liberal “gem” — is sitting on a ticking time bomb of pension debt.
The Sacramento Bee reports:
Nevertheless, pension systems have seen their “unfunded liabilities” continue to increase — giving California one of the nation's widest gaps between earning assets and pension obligations.
California’s unfortunate status is confirmed in a new report from Pew Charitable Trusts, which found that in 2015 the state's two big pension funds had the nation's sixth-worst record of reducing unfunded liabilities, gathering just 79 percent of the $18.9 billion they needed to keep their pension debts from rising.
California's status may have worsened since then. In 2015, Pew reported, the California Public Employees' Retirement System and the California State Teachers' Retirement System had 74 percent of what they needed to meet pension obligations, but that ratio has since dropped to about 64 percent due to reductions in their projected investment earnings.
What emerges from this picture is a precarious balancing act. The pension systems are trying to keep their funding levels from dropping below a point of no return while simultaneously trying to prevent pension contributions from driving local governments and school districts into insolvency.
Pretty picture, no?
Ultimately, the taxpayers bear the brunt of legislators' cavalier neglect of budget rules that regular people have to follow every day:
Battle says the cost to taxpayers in additional interest the next time Illinois sells bonds, which it inevitably will need to do in the long-term, could be in the “tens of millions” of dollars or more.
The more money the state has to pay on interest, the less that's available for things such as schools, state parks, social services and fixing roads.
“For the taxpayer, it will cost more to get a lower level of service,” Battle said.
Comptroller Susana Mendoza, who controls the state checkbook, agreed.
“It's going to cost people more every day,” she said. “Our reputation really can't get much worse, but our state finances can.”
The problem for Illinois isn't just that free-spending liberals are running out of other people's money, it's also that there are fewer “other people” in the state than there used to be.
One doesn't exactly have to be a Nobel Laureate in economics to see that this equation isn't sustainable.
Please note: This is a commentary piece. The views and opinions expressed within it are those of the author only and do not necessarily reflect the editorial opinion of IJR.