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Illinois Budget: What it Does and Doesn’t Do (Surprise Giveaway to Muni Bondholders?)

Courtesy of Mish.

Illinois now has a budget, the first in three fiscal years. An excellent writeup on The Stump entitled Illinois Financial Disaster: Even More Reactions to the Budget explains what passage of the budget does and does not do.

Here are some links mentioned by The Stump and a few additional links and comments by me.



The Budget Fixes Nothing

Mark Glennon at Wirepoints comments on the Many Ways Illinoisans Won’t Pay Higher Taxes

It’s not just that people are leaving because of taxes, though that’s probably the biggest problem. Long before last week’s tax increase over half of Illinoisans were telling pollsters they wanted to leave the state, citing taxes as the biggest reason.

Remember how the deniers a few years ago ridiculed what was then just anecdotal evidence of people leaving, especially big taxpayers? Census and tax data eventually backed it up. This is no different.

It’s happening within Illinois, too. People will shop where sales taxes are lower because those rates have become so meaningful to them. One reader told me about how busy the take out Peapod location is in Deerfield, Lake County. Cook County shoppers are going there, just across the county line, to take a couple points off their sales tax.

As for me, I’m writing this from a house in southeastern Wisconsin my wife and I bought recently. I figured we’d get ahead of the escape-from-Illinois crowd that’s increasingly feeding demand here. If Illinois doesn’t adopt the radical changes it needs by the time my youngest graduates from high school there, I’ll make this my permanent home — like so many Illinois ex-pats I’ve met here have done. In the meantime, we’ll buy our groceries here often, where they’re exempt from any sales tax.

Illinois’ tax collections have already been dropping. Last week the state released its report for the fiscal year that ended June 30. Tax receipts declined 3.2% — almost $1 billion from the preceding year.

I think we are well past the top of the curve — the point where higher rates result in less tax yield. Sure, tax receipts will surge for a few years. Maybe the state will get the $5 billion per year it claims — at first. It takes time to move or adapt in a way that reduces your taxes. But it won’t hold up. Too many people are too furious. They won’t pay, one way or another.

Not Even Balanced

Legislative Democrats boast that the $36 billion budget they approved is not only $1 billion less than Rauner himself proposed, but $3 billion less than the “autopilot” government spent annually. But Rauner’s administration complains the budget still is $1 billion or more out of balance.

So they’re spending $1 billion more than they expect to take in as revenue. That’s a 3% gap, which does sound small, until you realize that a bunch of these small, and not so small, annual gaps have accumulated as state debt. Which is a hell of a lot bigger than $1 billion.

It Doesn’t Fix Pensions

Joe Cahill at Crain’s Chicago says New Budget Threatens to Deepen Pension Debt

Lawmakers in Springfield appeared to face up to Illinois’ grim financial realities when they passed the first state budget in three years. The spending plan approved over Gov. Bruce Rauner’s veto does take a few steps to address deepening fiscal woes ignored during years of political stalemate between the governor and Illinois House Speaker Michael Madigan. It brings a measure of relief to state vendors owed $15 billion in unpaid bills, and might stave off a downgrade of Illinois bonds to junk status.

When it comes to the state’s gravest budgetary peril, however, the 2018 budget is another exercise in denial and can-kicking. Legislators did nothing about unfunded state employee pension obligations estimated at $130 billion, an albatross that will surely drag Illinois under unless aggressive action is taken to reduce the shortfall. In fact, the new budget could even enlarge the pension funding sinkhole.

State contributions to pension plans will decline $1.5 billion in fiscal 2018, by far the largest single spending cut in the budget. And some $900 million of that reduction reflects wishful thinking about future investment returns at state employee pension funds.

For years, Illinois failed to make contributions sufficient to fully fund obligations to future retirees. Only recently did the state step up contributions. But now Illinois is taking a step backward. Even in a best-case scenario, smaller contributions will slow the return to pension solvency. And the enormous pension shortfall will grow larger if the rosy return assumptions embraced by our political leaders don’t come true.

Got That?


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