A severe budget deficit, underfunded pension liability, rapidly increasing health care costs, and a high unemployment rate. These are just some of the obstacles Illinois is facing as it struggles to get its economic house in order.
Illinois has an operating deficit of $5.8 billion and $6.5 billion of unpaid bills from the past two years, according to a report issued by the Economics team at the University of Illinois Institute of Government and Public Affairs. The fiscal crisis, the report outlined, has “burdened social service agencies and organizations that contract with the state. Credit down-grades have also increased the state’s borrowing costs (through higher interest rates).” The situation has left the state’s image “tarnished.”
In addition, in terms of pension benefits promised to public workers covered by the state’s systems, there is a difference of up to $80 billion in what the state is committed to pay and what it is likely to have on hand when it comes time to make those payments.
The best available data, the report cautioned, suggests that Illinois will grow at a rate of 1.7% while the rest of the country will grow at a 2.8% rate. This is because of the fiscal instability that could result in fewer new businesses being opened in Illinois or current businesses forced to leave the state.
Put simply, Illinois has been spending more money than it’s been taking in. The state’s problems began long before the 2008 recession, which itself caused a decrease in sales and income tax revenues. The 2001 recession and the terrorist attacks on Sept. 11 “tanked the economy for awhile,” said Charlie Wheeler, professor at the University of Illinois Springfield. “The state had put together budgets based on expectations we would take in x amount of dollars. The number that came in was more than $2 billion less. Rod Blagojavich took (the governor’s) office in 2003, and he used a number of what I would refer to as extraordinary accounting measures to paper over the fact we were committed to spending more money than our revenues were providing. And it finally caught up with us.”
The recent economic downturn has caused more people to rely on social services, such as Medicaid, which constitutes 21% of the state budget. Meanwhile, federal rules require that Illinois maintain high levels of spending on K-12 education to be eligible for stimulus payments. K-12 education constitutes 15% of the state budget. However, federal stimulus funds are being phased out, so the state cannot continue to spend at its current pace.
Current Gov. Pat Quinn and a lame-duck legislature pushed through a 67% increase in the state income tax and a 45% increase in the corporate tax to close the projected budget gap, which the Wall Street Journal reported is expected to grow to $17 billion in fiscal 2012. This is estimated to generate $6 billion, far less than what is needed. Critics of the increase say it will be devastating to taxpayers.
In another controversial move, Quinn signed into legislation the so-called “Amazon Tax,” which will levy new taxes on online retailers that do not have a physical presence in Illinois, but that do business with “affiliates” that direct their customers to the online retailer. It would, for example, require Amazon to collect sales tax on all purchases made in the state. Proponents of the legislation said it would result in $150 million in revenues. But Amazon.com , as it did in Colorado, North Carolina, Rhode Island, and other states that passed similar legislation, ceased relations with its “affiliates.” Some of these business owners have said they will have to leave the state.
But it’s not all bad news. Consumer spending, which generally accounts for two-thirds of more of total spending in the economy, is showing signs of improvement. Retail sales rose for the seventh consecutive month in January, according to a report just issued by the Illinois Commission on Government Forecasting and Accountability. Much of this improvement is attributed to improving consumer attitudes, which have rebounded from the lows reached in early 2009. However, the report cautions, these levels remain well below what they were during the first seven years of this decade.
“We’re going to be struggling for a couple of years,” Wheeler said. “We need the economic recovery to fully take hold and for Illinois to be in the situation in which we see actually see good revenue growth from year to year just through economic activity.”