Illinois’s Date with Reality
“Our rendezvous with reality has arrived,” said Governor Pat Quinn of Illinois. The Govenor was referring to the mounting fiscal issues facing the state as it falls further and further into debt. But, the state did not arrive at the edge of insolvency without a number of missteps along the way. Having the fourth highest combination of local and national corporate tax rates in the industrialized world was likely not a step in the right direction.
Today, Illinois taxes are the highest of any of the surrounding states and some of the highest in the country, but that tax revenue was never saved and used for the state’s liabilities. One such liability is state’s pension fund, which is now staggeringly underfunded. Instead state government spent the incoming revenue on corporate tax incentives to keep businesses from leaving and on short-term expenditures. In fact the state has run a deficit of $13.5 billion dollars in FY 2011. Until now, the state had used state bonds to finance this debt but as the debt has grown over the years, so have questions as to how long investors will continue to purchase the state’s debt.
Illinois is at the beginning of a long struggle against its mounting debt and unfunded liabilities, and unfortunately no help is coming soon. Recently, Chairman of the Federal Reserve Ben Bernanke made clear that a new stimulus is unlikely unless the economy, “unexpectedly deteriorates.” While rates will continue to be near 0% according to the Federal Open Market Committee, no action will be taken to drive up the prices of goods anytime soon.
The future is bleak for Illinois. After years of high tax rates and spending that out paced revenues, the state has some tough decisions to make. While Gov. Pat Quinn has suggested increasing the retirement age for the state’s pension to 67 from 65, the move would bring the program back to solvency. This leaves only spending cuts to stabilize the state’s deficits and debt. Hopefully they make them soon, before the situation gets worse.