The Prairie State pestilence: Pensions, budget woes spread

January 14, 2011

Protesters demonstrate during a rally against government cutbacks for social services in Aurora, Illinois, June 18, 2009. REUTERS/John GressThe fiscal malady that plagues Illinois — and its painful treatment — may be coming to a state, county or municipality near you.

What will cure this spreading pox on the populace? Higher taxes, lower spending and that rare commodity: political honesty.

I feel the pain since I live in Illinois and will pay higher taxes. This couldn’t be more personal to me. My daughters’ school district is owed state money and has fired teachers. My father’s teachers’ pension fund (among others) has been methodically underfunded for years. I went down to our state capitol last year with other University of Illinois alumni to lobby the state legislature to pay more than $400 million in unpaid education bills.

The Prairie State’s teaching moment was ignited by the Illinois legislature’s passage on January 11 of a tax increase that will raise $6.8 billion for state coffers and impose spending limits. The personal income tax will climb from three percent to five percent; the corporate levy from seven percent from 4.8 percent. It’s a mere finger in the dike as the state still needs to borrow to cover pension obligations. The rates may ratchet down over time.

Sad as this may sound, the Chicago Cubs have been managed better than the Illinois budget. The state was running a $13 billion budget deficit, which could balloon to $15 billion; it was in the worst fiscal shape of any state. Its shortfall was nearly twice that of California, which has nearly three times the population.

As a taxpayer, I’m outraged that things got this bad. As a citizen, though, I still want education to be fully funded, public-employee pensions to be honored and my state to invest heavily in infrastructure and job-creating programs.

While Illinois is a poster child for horrendous fiscal management, other states and municipalities are hurting in a similar way. Banking analyst Meredith Whitney says 50 to 100 municipalities may file for bankruptcy.  JPMorgan Chase CEO Jamie Dimon recently echoed that concern.

In good times, many governments were generous with retirement and health benefits. They kept doling out the goodies with the assumption that widespread economic growth and a robust stock market would bail them out.

Yet the best intentions were declared on the road to hell. The stock market tanked three times in the last decade and took down public pension fund returns. Bond yields are abysmal. The ongoing housing crisis pummeled nearly every state by reducing income, property and sales tax revenues. Public pension payments were grossly inflated by bumping up salaries and bonuses in the final years of service.

The recession zapped state revenues by more than 30 percent between 2008 and 2009, the U.S. Census Bureau reported. That meant more teacher layoffs, furloughs for university professors and cutting services in countless communities. I went through my local school district’s budget with other citizens with a fine-toothed comb last year. It was like picking fleas off a lion.

The federal stimulus plan of 2009 helped somewhat, but not enough to offset a collective $130 billion state budget shortfall, according to the Center for Budget and Policy Priorities. Some 40 states project budget gaps totaling $113 billion for next year and 46 states posted a deficit last year.

With the new bailout-averse Congress in place, it’s unlikely that we’ll see another major stimulus plan being passed that will ease the burdens on state houses and city halls. In the interim, sacrifices will abound.

Pension formulas will be downgraded. Benefits will be cut. Public employees will have to dig deeper into their pockets to pay for pension and health-care benefits. And taxes will certainly be raised if cuts fail to restore balance.

Not all taxes need to be onerous and unfair, though. It’s once again time to consider a tax on carbon, raising a motor fuel tax that hasn’t kept pace with inflation and a tax on financial speculation.

If I believed that states could “grow their way” out of their fiscal messes, I’d say wait on new taxes. Yet that won’t likely be the case in most states where jobs have been permanently vacuumed away by emerging economies. The best tax would be one that spurs a reinvention of the economy while creating private-sector employment and channels money back into communities. It would be a hallmark of social capitalism.

If only Illinois (and many other states) wasn’t too broke to take this next step. It would restore my faith in Prairie Populism. I might even root for the hapless Cubs again.

7 comments

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Like most other states and the Federal government, Illinois needs to cut social programs and concentrate on the basics – education, law enforcement and infrastructure.

The first step is to corral the unions and their outrageous compensation. They are by definition corrupt blood suckers that are draining the economy.

Next is to eliminate “professional” politicians. They must be restricted to a single term.

Posted by BBJJ | Report as abusive

Let me see if i understand – you want the old socialist union guy pension without an increase in taxes? You believe the LARGE federal government should be on hook for funding your state guaranteed pension. Wow, now I begin to understand the depth of the problem we are facing. An entitlement society is alive and well in Illinois.

Posted by mydc | Report as abusive

The massive state budgets are over-bloated and have been. They religously have followed Federal spending policies to some regard and were encouraged through financial incentives to do so. With the collapse of “free money”, many things are changing and most aren’t sure what to do now. I believe that the majority of State Govt’s, local, and municipal are in very bad shape financially, and will probably collapse this year. The laws we have are numerous, punitive for life, and completely unsustainable in every sense of the word. Why on earth would i want to see my neighbors boy go to prison for smoking pot at $50k a year, and one less person to contribute to society when released? Has he been rehabilitated? What about the 60 or 70 year old man or woman? How about the Dad whom shares a drink responsibly with his 18year old (son) man? Which honestly this carries great significance and importance, but is seldom discussed here. He can carry and kill, but he can’t drink a beer with his son? HUH? When i’m being asked on a local level to pony up more money for gas, so the school bus can come get my kids and take them to school. The costs for sports activities have grown beyond reach for the have-knots and many kids parents simply don’t have the money anymore given the realities of the harsh economic times. The jobs are gone, roads are crumbling, and the quality of our kids education is suffering badly, as well as critical health services, yet somehow somebody is still able to justify why i need to spend 50k a year to keep Johnny locked up. This is the reality, and this has become our priority!

Posted by schmetterling | Report as abusive

America incarcerates too many blue-collar criminals, but don’t even prosecute most white-collar criminals and silk-collar criminals.

We need to aggressively go after the guys who caused the Collapse and those who profited by the events leading up to it.

Having the SEC investigate and levy a modest fines against a few of the involved Wall Street corporations falls far short of justice.

You need money to make states and municipalities whole again? Get it from Wall Street. That’s where the money is. Ordinary people don’t have vast sums of money. You can’t ask rain from a blue sky.

Wall Street takes in so much money that they were able to pay off their massive government bailouts in just two years and they still had enough money left over for some nice bonuses.

Now that they are free of their debt to government, they can easily afford to pay their debt to society.

Posted by breezinthru | Report as abusive

I would like to see the honesty thing happen. I believe Jerry Brown, here in California, is talking tough honestly. He’s slashing budgets and programs and also requesting to keep expiring taxes. He’s slashing nearly 20% from the University system but keeping K-12 funding level. He’s slashed the Governor’s budget and requested the same of congress. He’s proposed eliminating many programs like the redevelopment agency. The cuts are phenomenal and coming from a Democrat, they are unbelievable. But Jerry needs a half dozen Republicans for the 2/3rds required to send it to the voters for approval. So guess what, the Repbulicans balked at maintaining expiring taxes! It’s like they want to bankrupt our Universities. California has had some great Universities but perhaps they will be history. Oh well, it is in line with our ranking at 49th in K-12 student spending. Unfortunately it means we will need to spend more on prisons so the students have some place to go when the leave school.

Illinois is raising taxes significantly. But all they needed was a simple majority and wala. Rather than face tough cuts, they did the quick and easy thing– right before the Republicans took over. Since voters have short memories, they’ll be angry at the Republicans who are in power when the pain gets felt. Savvy move. But not honest. More really should have been done to cut waste. A 2% cap on growth really doesn’t address the real problems.

As the politicians seek divisive issues on which to take a (grand) stand, and the media’s lust for shocking headlines, and corporate profits get sucked up to the top and pensions get underfunded, are we all just to swing by the drive through for dinner just to rush home and watch our lives flicker away in front of the TV? Isn’t it time we rolled up our sleeves to work together instead of fighting all the time?

Posted by LEEDAP | Report as abusive

You’re just figuring this out now?

Posted by threeRivers | Report as abusive

Your suggestion would be like a family one day away from foreclosure saying lets cancel HBO and lets switch to store brand foods. The numbers are enormous in Illinois, Chicago, and all the large cities like Peoria. Massive bankrupticie must occur and no bailout should happen. Illinois was just a 30 year party of govt workers and teachers ripping off the system..i read this every day. And although i voted for Obama(my first Dem vote)I am starting to realize the Illinois system disqualifies anyone from holding national office. I probably should have read your book before the election.

Posted by olderbutwiser | Report as abusive

[…] financial system. As its stands now, it’s too big to succeed, has more financial migraines thanCalifornia and Illinois combined and needn’t be a candidate for another public bailout. Been there, done […]

Posted by Five Reasons to Dismember Bank of America | The Wall Street Job Report | Report as abusive