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Economy & Business

Commentary: When will Illinois get its fiscal house in order?

This article first appeared in the St. Louis Beacon, Jan. 29, 2013 - A firm’s bond rating often reflects future profitability. Bond rating firms, such as Standard & Poor’s or Moody’s, though much maligned in recent years, do a good job measuring a firm’s credit worthiness. Firms that demonstrate the ability to pay their bills and profitably produce a good or service garner the highest of bond ratings, such as S&P’s gold-star AAA. Firms for which bankruptcy is likely get the lowest ratings, commonly referred to as junk.

Bond rating agencies also assess the credit worthiness of states. Is the state able to pay its bills? What is its fiscal and economic outlook? Based on the answers to such questions, last August Standard & Poor’s dropped Illinois’ rating from A+ to A. This is the second lowest rating of any state in the country: Only California had a lower rating. Further sinking Illinois’ already low rating sent a clear message to Springfield: Get your fiscal house in order.

California’s political leaders responded to its fiscal crisis and poor bond rating. After California Gov. Jerry Brown took office in 2011, he and the state legislature began instituting tough, necessary and politically unpopular cuts in bloated state spending. They also raised tax revenues. Their actions pushed the California budget out of a deep hole back to fiscal balance: California is projected to run a budget surplus for the 2013-14 fiscal year. With the budget under control, talks have begun about how to responsibly restore spending in key areas like education and healthcare. An upgrade in their bond rating wouldn’t be surprising.

How have Illinois’ political leaders responded? Calls for dealing with the fiscal chaos have gone wanting. Instead of getting spending under control, Illinois is going to increase its already swollen debt by offering $500 million in general-obligation bonds to help cover outstanding liabilities. The dysfunctional legislature once again has punted Illinois’ fiscal calamity down the road, extending more low-grade debt to pay its mounting bills.

The biggest issue facing Illinois policy makers is the state’s underfunded pension system. By most accounts, the state’s unfunded liability — expected future inflows being less than promised payments — is closing in on $100 billion. The various state pension plans in aggregate have less than 40 percent of the assets needed to cover contractually promised obligations to future retirees. As more state employees retire, that unfunded liability worsens by millions of dollars on a daily basis.

Such inaction has led the major bond rating agencies to give Illinois a “negative outlook.” This portends more downgrades in the state’s bond ratings that will force the state to pay an even higher interest rate on the bonds it sells.

As Illinois’ bond ratings worsen, how are its neighbors doing? Standard & Poor’s gives Indiana, Iowa and Missouri debt each its AAA rating. Wisconsin debt is rated AA. Illinois’ comparatively poor bond rating reflects and will influence its diminishing economic prospects. Between 2000 and 2010, data available at the Tax Foundation shows that per capita income in Illinois grew at a slower pace than in Missouri and Iowa, about the same pace as Wisconsin and only slightly faster than in Indiana. Future economic growth — jobs and incomes — are at risk with continued fiscal fumbling.

Alicia Munnell, director of the Center for Retirement Research at Boston College, examined the viability of state pension systems in her 2012 book “State and Local Pensions: What Now?” Her assessment of Illinois’ condition is a dire warning that politicians and those who elect them should heed: “Without changes, the state will have to cut back on its support for roads and other infrastructure, universities and colleges, health services for low-income individuals and other expenditures that contribute to the quality of life within the state.”

R.W. Hafer is a research professor of economics and finance at Southern Illinois University Edwardsville and a research fellow at the Show-Me Institute.

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