In Illinois, Reckless Fiscal Policy Colliding with COVID-19
COVID-19 has affected every aspect of American life, and state and municipal governments are no exception. States that have large amounts of unfunded liabilities and debt, like Illinois, are feeling especially strained now that COVID-19 has disrupted economic activity. Remarkably, S&P Global just moved the Land of Lincoln’s credit outlook to “negative,” bringing it closer to junk bond status.
The financial problems facing Illinois did not manifest overnight (or over the past month). They are the result of decades of irresponsible government spending and debt accumulation.
New research from the ALEC Center for State Fiscal Reform shows Illinois has over $62 billion in bonded obligations (just under $4,900 per Illinois resident) and over $64 billion in unfunded liabilities for other post-employment benefits (OPEB) (just over $5,000 per Illinois resident), both some of the largest amounts of unfunded OPEB and bonded obligations in the country ranking 46th in the country for both OPEB unfunded liabilities and bonded obligations.
A forthcoming ALEC report on unfunded pension liabilities also finds that Illinois has $359.6 billion in unfunded pension liabilities (just over $28,000 per Illinois resident), the second largest amount of unfunded liabilities overall and per capita in the country (California has the largest total unfunded liabilities, Alaska has the largest unfunded liabilities per capita).
Altogether, that state debt totals over $486 billion dollars (over $38,000 per Illinois resident) and represents an astounding 56% of Illinois’ 2018 GDP and 1,386% of 2018 General Fund Expenditures.
This $38,0000 per capita debt burden could cover the full cost of an academic year at Illinois State University for an Illinois resident (that includes tuition, room and board, books and supplies, transportation, meal plan and $3,300 for personal expenses) and still have $6,600 left over.
Unfunded pension and OPEB liabilities piled up due to state policymakers over-promising benefits to public workers and consistently underfunding pension and OPEB plans. Each year, state governments must make annual required contribution (ARC) payments to pension and OPEB funds. That ARC payment goes toward covering normal costs for that year and paying down unfunded liabilities from previous years.
In the latest findings, Illinois only paid 65% of its pension ARC payment and 16% of its OPEB ARC payment. The state has failed to make its full ARC payments for both Pension and OPEB since 2012, causing unfunded liabilities to grow rapidly.
The Supreme Court of Illinois ruled in 2015 that the state is constitutionally obligated to pay out promised pension benefits regardless of economic condition or fiscal health of the state. In that same case, the Supreme Court of Illinois also ruled that the state could not alter cost of living adjustments (COLAs) for future hires. Despite the Supreme Court ruling, Illinois did not change its bad habits or improve pension funding. The ruling also sets precedent for the state to continue paying out pension benefits, even if state debt is restructured.
By 2018, two years before most people could imagine a pandemic hitting the United States, the state of Illinois had General Obligation Bond Ratings of Baa3 from Moody’s, BBB- from S&P Global Ratings, and BBB from Fitch, all bond ratings just above junk bond status. The downgrades in credit ratings have also meant higher interest costs for Illinois state debt, which take up 10% of tax revenue. On Illinois General Obligation bonds, 30.68% of debt service costs are interest costs (6th highest in the nation), which is 64.40% higher than the 18.66% average interest rate cost for state general obligation bonds. The higher interest rate premium is due to Illinois low credit rating.
Illinois has tried to tax its way out of this problem, with 9.5% top marginal corporate income tax rates (8th highest in the nation), a property tax burden of $40.60 per $1,000 of personal income (8th highest in the nation), and numerous other tax burdens). To make matters worse, Illinois continues to increase its taxes and fees. Last year alone, the state tax and fee increase totaled $6.9 billion.
The massive amounts of state debt and high taxes in Illinois have taken a toll on overall economic health. The annual ALEC publication Rich States, Poor States finds that Illinois had one of the worst economic performances and worst economic outlooks in the country during the past several years of overall economic growth in the United States.
The economic downturn caused by COVID-19 means the consequences of decades worth of irresponsible policies have arrived sooner than expected in the Land of Lincoln.