This article first appeared in the St. Louis Beacon, April 30, 2012 - The state of the state of Illinois is not good. Consider the unpleasant statistics:
- The unemployment rate in Illinois was 9.1 percent in February. This is significantly above the national rate of 8.3 percent and exceeds that in the five neighboring states. Those states, with an average unemployment rate of 7.3 percent, have done much better at creating jobs following the recession.
- The U.S. expanded at a 2.6 percent rate between 2009 and 2010. The Illinois economy, however, expanded at a modest 1.9 percent rate. The neighboring states? Their output increased at an average rate of about 3 percent.
- Illinois experienced a net loss of residents to other states over the past decade. Its neighbors didn’t. Residents of Illinois found better opportunities elsewhere and moved away to take advantage of them.
Past population losses and lackluster economic growth are sunk costs. But should such a dismal record define the future? If Illinois is going to turn its economic ship around, the failure of state government to manage its spending and taxation policies is a good place to start reforms.
The Illinois Policy Institute, a market-oriented organization in Springfield, recently published its Budget Solutions 2013. The wide-ranging report provides useful information on how the state got into its current mess. Let’s focus on the spending side.
The gist of the problem is that the Illinois government increased spending while state revenue failed to keep pace. Over the past two decades, state spending per person increased an astounding 85 percent. The legislature belatedly reacted to demands for reform by imposing a budgetary cap on spending last year. But it is ineffectual: The cap far exceeds any reasonable estimate of expected future revenue. Legislators, while taking credit for stopping the runaway spending bus, can simply continue their profligate spending.
The institute suggests numerous ways spending can be reduced. The list includes a balanced budget amendment to the state constitution. Such amendments, though, usually are not sustainable in bad economic times, and politically legislators usually find ways of circumventing them.
One reform is to cap the rate of growth in spending to population growth plus inflation. This rule has the beauty of being measurable and transparent. It makes state legislators and the governor more accountable for their actions. While politically unpopular, this policy has the potential to halt the runaway spending train.
Why must spending be brought under control? Illinois faces huge unfunded liabilities to previous state workers. One is unfunded pension liabilities. The institute’s report notes that the five state pension systems that Illinois owes is short about $85 billion. This figure puts Illinois in the top five states facing huge unfunded liabilities to its retirees. But the picture is even gloomier. Projecting out over the next 30 years, Illinois’ commitment to state retirees’ health benefits may be over $100 billion. The report sums it up: These health benefits, promised in the good times, “will work in tandem with rising pension costs to dramatically crowd out resources for core government services.”
While tax reform garners attention, more energy needs to be focused on stopping the reckless spending that has crippled the once-powerful Illinois economy. If sensible reforms are not made, and soon, the state will abrogate its contractual obligations to future retirees. It also will be forced to renege on its promise to provide residents with a reasonable level of government services for their tax dollar.
If reform does not begin soon, Illinois will lag further behind its neighbors, government services will decline and residents will continue to vote with their feet as they vacate to states with better economic opportunities.
Rik Hafer is a distinguished research professor and chair of the Department of Economics and Finance at Southern Illinois University Edwardsville and a scholar at the Show-Me Institute.