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Posts Tagged ‘Illinois’

Here are a few predictions for next year. It will be hot in Dallas in July, it will be cold in Stockholm in February, and Governor Jerry Brown of California will ask Uncle Sam for some sort of bailout.

I’m actually not sure about the first two predictions, but I think the last one is as close to a sure thing as you can get. Sven Larson is one of America’s top experts on state fiscal issues (his blog is an excellent resource for people who want to keep informed about the shenanigans of governors and state legislatures), and here’s his assessment of the mess in California.

California state spending has outgrown the state’s tax base by 1.3 percentage points annually for 25 years. Simple arithmetic dictates that in lieu of constant tax increases, this perpetuates a deficit. From 1985 to 2009 state GDP in California grew by 5.5 percent per year, on average (not adjusted for inflation). Annual growth in state spending was 6.8 percent, on average. Three spending categories have dominated this spending spree: public schools, cash assistance and Medicaid. Making up half of state spending, they are outlets for traditional redistributive welfare state policy. …Of the three aforementioned spending categories, two have grown faster than state GDP, i.e., the tax base, throughout the past quarter-century: • Public school spending grew at 6.5 percent per year on average, one full percent faster than state GDP • Medicaid grew at 10.7 percent per year on average, approximately twice the rate of state GDP.

In other words, California is in a fiscal mess because spending has grown too rapidly. It’s unclear why taxpayers in other states should be ripped off so that Golden State politicians can maintain an unsustainable vote-buying racket – particularly when the state goes out of its way to punish economic growth and discourage job creation.

To make matters worse, bailouts (or even the expectation of bailouts) send a terrible signal. Matt Mitchell (no relation) of the Mercatus Center looked at precisely this issue and concluded that state politicians would be even more profligate if they got any indication that they could shift the tax burden to people in other states. He even found an interesting study showing how sub-national governments in Germany responded to this kind of perverse incentive structure. Here’s an excerpt from that research.

States with a softer budget constraint [i.e., greater expectation that the German national government will bail them out], have higher deficits and debts and receive more bailout funds. …The larger the expectation of a bailout, the higher the amount spent in a number of spending categories, and special interests are most likely to benefit from this additional spending. We also find that bailout expectations lead to less efficient state government service provision.

By the way, I don’t want to imply that this is solely a California issue. There are several states that have taxed and spent themselves into fiscal ditches. Indeed, it’s quite likely that Illinois may be the first state to experience a fiscal collapse.

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The New York Times has a story about the budget debacle in Illinois, which is a classic case of a state with too much government and too many overpaid bureaucrats. Other than being an example of what not to do, the most interesting aspect of what’s happening in Illinois is trying to guess whether it is in better or worse shape than California. According to the credit default swaps market, Illinois is in slightly worse shape. Both states rank below Iraq and above Romania:
Even by the standards of this deficit-ridden state, Illinois’s comptroller, Daniel W. Hynes, faces an ugly balance sheet. Precisely how ugly becomes clear when he beckons you into his office to examine his daily briefing memo. He picks the papers off his desk and points to a figure in red: $5.01 billion. “This is what the state owes right now to schools, rehabilitation centers, child care, the state university — and it’s getting worse every single day,” he says in his downtown office. …For the last few years, California stood more or less unchallenged as a symbol of the fiscal collapse of states during the recession. Now Illinois has shouldered to the fore, as its dysfunctional political class refuses to pay the state’s bills and refuses to take the painful steps — cuts and tax increases — to close a deficit of at least $12 billion, equal to nearly half the state’s budget. Then there is the spectacularly mismanaged pension system, which is at least 50 percent underfunded and, analysts warn, could push Illinois into insolvency if the economy fails to pick up. …signs of fiscal crackup are easy to see. Legislators left the capital this month without deciding how to pay 26 percent of the state budget. The governor proposes to borrow $3.5 billion to cover a year’s worth of pension payments, a step that would cost about $1 billion in interest. And every major rating agency has downgraded the state; Illinois now pays millions of dollars more to insure its debt than any other state in the nation. “Their pension is the most underfunded in the nation,” said Karen S. Krop, a senior director at Fitch Ratings. “They have not made significant cuts or raised revenues. There’s no state out there like this. They can’t grow their way out of this.”

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Apologies to Elizabeth Barrett Browning, but I had to paraphrase her famous line after reading this Bill McGurn column in the Wall Street Journal about how Republican political hacks in the Illinois state legislature voted to kill a voucher bill that would have rescued inner-city children trapped in terrible government monopoly schools. If you don’t hate government and despise politicians after reading this excerpt, there is something deeply wrong with your soul:

Illinois has given us a new breed of Republican: Roger Eddy. Mr. Eddy is what they call a downstater, an assemblyman who serves an east-central Illinois district hugging the Indiana border. His day job turns out to be in government as well, as a public schools superintendent. Last week Mr. Eddy became the face of the Republican failure to get a voucher bill through the Illinois assembly. The bill had passed the Senate. Yet despite being pushed by a remarkable coalition involving fellow Republicans, a free-market state think tank, and a prominent African-American leader, only 25 Republicans in the House voted yes. That was 12 votes short. Mr. Eddy was one of 23 Republicans who killed it by voting no. …the GOP failure is striking. Republicans typically complain about not getting black support for reforms that would benefit primarily black families. In this case, however, they had that support, in the form of the Rev. James Meeks, a African-American state senator leader whom Barack Obama has called a spiritual adviser. …According to the Illinois State Board of Elections, since 2002 Mr. Eddy has accepted more than $76,000 in campaign contributions from the Illinois Education Association, the Illinois Federation of Teachers, and the Chicago Teachers Union. … Less than a month ago, the same teachers unions that have given so generously to Mr. Eddy made up a large chunk of the 15,000 protestors who converged on the state capital shouting “Raise Our Taxes” as the solution to the state’s $13 billion budget gap. ..The pity is there were 25 Republicans who did come through. The Republican house leader did what he could. One Republican legislator, a former public school teacher, was in tears on the House floor, begging for this bill. All these people went out on a limb with Mr. Meeks—and Republicans like Mr. Eddy sawed that limb off.

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The Chicago Tribune reports that a bunch of government bureaucrats went to the capital of Illinois and protested in favor of higher taxes. But it’s not exactly news that looters want more looting. The amazing thing to note is that the Democrats have complete control of Illinois government yet they are afraid to raise tax rates because they know voters are sick and tired of corrupt and inefficient government:

Thousands of teachers and other union workers descended on the state Capitol on Wednesday and chanted “raise my taxes” to try to pressure politicians to avoid major budget cuts. The vibe was the exact opposite of what you’d find at a tea party rally. But the loud chants barely resonated inside the Capitol, where lawmakers are trying to exit Springfield in a couple of weeks without voting for a tax increase that could jeopardize their re-election chances in little more than six months. …Gov. Pat Quinn is out front pushing his 33 percent increase in the income tax rate, but he’s getting lonely. Many lawmakers don’t want to take more money out of people’s wallets as unemployment remains high in Illinois, yet groups that receive tax money said Quinn’s proposed tax hike isn’t big enough to help bridge a deficit that’s expected to reach $13 billion if nothing is done. Complicating the matter is that Quinn faces Republican state Sen. Bill Brady of Bloomington in this fall’s race for governor, and Brady is taking the position that no tax increase is needed. …Last year, the Senate Democrats, led by President John Cullerton of Chicago, passed a tax increase that would increase the personal rate to 5 percent from 3 percent, along with a slight bump for corporate taxes. But the tax increase is stalled in the House, where last year, the Democrats in control did not muster enough votes for a smaller, temporary income tax increase.

P.S. Welcome Instapundit readers. I’ve heard about the “Insta-lanche” that occurs when Glenn links something, but this is my first time experiencing the phenomenon. I hope you take the opportunity to check out some of the other postings and visit again.

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